Municipais rose 1/4 to 3/8 point yesterday in a light to moderately active session that saw a steady, but manageable amount of bid lists.

"It is a follow-through, and we are chasing Treasuries a little bit," one trader said. The markets had been "pretty much oversold for a long time," he added.

There was some cash on the sidelines that players decided to put to work yesterday, the trader said.

Also bolstering the market yesterday was a realization that after Friday's weaker-than-expected September employment report, the Federal Reserve was not as likely to boost interest rates again in the immediate future.

The market will receive key inflation news this week, with the release Thursday of the producer price index, and the consumer price index on Friday.

A municipal analyst yesterday said dollar bond prices rose 1/4 to 3/8 point, while yields on high-grade issues improved by three basis points or more.

"There's been sort of a steady flow of bid wanted lists out, but it hasn't been overwhelming," a municipal trader said. He added that there has been a little bit for everybody -- some New York paper, some national paper, and California paper.

"I think that they're getting fairly decent bids on average," the trader said.

In debt futures, the December municipal contract closed up nearly 1/2 point to 86 30/32. Yesterday's December MOB spread was negative 379, compared with negative 383 on Monday.

One trader said the municipal contract was perceived as cheap and municipal cash was perceived as rich last Friday, when the government's long bond was trading toward an 8% yield.

When Treasuries caught a bid Friday, no one could buy muni cash because there just wasn't that much representative cash available. Consequently, players did the next best thing and bought the contract, which they perceived as cheap anyway, this trader said.

After running the contract up Friday, players took it up again on Monday in a very thin, Columbus Day holiday market, when again nobody would offer cash because everybody was at half staff.

When players walked in yesterday, the contract had probably gotten closer to fair value, but people were short and had to cover their contracts, the trader said. That, he added, led to more muni contract buying, which pushed it up again. Consequently, cash was perceived as cheap, which prompted the arbitragers to buy cash. That pushed the cash market up, he said.

In the government market, 30-year Treasury bonds gained slightly more than 3/8 to yield 7.86%.

Tony Crescenzi, head of fixed income at Miller, Tabak, Hirsch & Co., said most market gains stemmed from a New York Times article that said the central bank may refrain from tightening monetary policy a little bit longer than it was believed last week. The market now seems to be anticipating one Fed move instead of two by yearend, Crescenzi said.

"It just seems like the Fed doesn't want to get aggressive just yet," Crescenzi said. But he warned: "This could actually could come back to haunt the market if the inflation numbers are not favorable because then talk will escalate once again that the Fed is behind and following the market rather than leading it," he said.

"Also, gold was down sharply right at the open," Crescenzi said, adding that the Russian ruble fell 27% yesterday against the U.S. dollar, triggering speculation that the Russians would be selling gold reserves. Gold prices are viewed as a good barometer of inflationary expectations. Prices of base metals such as copper and lead have also been declining in recent days, Crescenzi said.

As for the Iraqi threat, "with each day that passes, the likelihood of an escalation of military conflict becomes less and less, because we get to deploy more and more troops," he said. "It's not the first day of the crisis when there's 4,000 troops there."

Christopher M. Dillon, a municipal market strategist at J.P- Morgan Securiries Inc., said statistical and anecdotal evidence tells him there's not much money flowing into municipal bond funds these days.

Dillon said municipal bond funds have experienced net outflows over the past several weeks, and Standard & Poor's Blue List, which measures dealer inventories, is now at relatively high levels.

Unless portfolio managers start to see more cash coming in, and dealer inventories start to lighten up, "it's kind of tough to see a large relative improvement in the muni market," Dillon said.

As for retail, "retail buyers as well aren't particularly keen on the fixed-income market, with rates rising," he said, adding, "the stock market, while it's been off a little bit recently, has intermittently been doing reasonably well, which means competition for retail cash flows."

Insurance companies, which were fairly large buyers in the beginning of the year, haven't been in for the past couple of months, Dillon said.

"On a relative basis, municipals from a historical perspective are reasonably expensive at the moment," he said. "And asset allocation wise, other areas I'm sure look equally if not more attractive."

In other news yesterday, the 30-day visible supply of municipal bonds totaled $4.75 billion, up $168.4 million from Monday. That comprises $1.731 billion of competitive bonds, up $118.4 million from Monday, and $3.019 billion of negotiated bonds, up $50 million from Monday.

Standard & Poor's Blue List of municipal bonds was down $67.1 million yesterday to $2.118 billion.

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