Municipals made gains for the second consecutive session yesterday and the good tone allowed underwriters to lower yields on a $300 million New York City offering.

The credit markets first surged Monday after passage of President Clinton's budget and tax package.

Monday's rally was led by the futures contract, but the cash market caught up yesterday. It was helped by a shortage of paper, which traders said forced some idle buyers back into the market.

A pending shortage of government paper was flattening the Treasury yield curve, also giving municipal players more confidence. After the current refunding is conducted, there will be no new long Treasury bonds issued for six months, prompting buyers to purchase long government bonds now.

Municipal prices opened 1/8 to 1/4 point higher, but managed 1/4 to 3/8 point gains overall by session's end, traders said.

But some dollar bonds made 5/8 point gains on the day.

For example, PICA MBIA 5 5/8 of 2023 were quoted at 99 1/8-3/8 to yield 5.68%, where they closed at 5.73% bid Monday. Fulton-DeKalb County Ga., Hospital Authority MBIA 5 1/2s of 2020 also outperformed the general market. The bonds were quoted late yesterday at 5.66% bid, 5.65% offered, compared to 5.71% bid near Monday's close.

Follow-through business also reflected a solid market. Merrill Lynch & Co. freed $430 million New York State Dormitory Authority revenue bonds to trade and prices generally rose 1/4 with the broader market.

The maximum term maturity of 2019, which carried a 5.25% coupon, was quoted late in the day at 5.72% bid, where it was originally priced to yield 5.75%.

In the debt futures arena, MOB buyers have also supported the market. The spread was unchanged yesterday at negative 416, but has narrowed recently.

The September municipal contract has been bouncing around 103.00, the high set in March and a key resistance level. The Sept. contract yesterday settled up 4/32 to 103.03.

The usual summer doldrums were interrupted yesterday, market players, and they reported active trading in what one player said is the market's "speculative, frothy stage."

Reflecting increased selling to permanent investors, The Blue List of dealer inventory fell $156.2 million yesterday, to $1.48 billion, its lowest level since June 7 when it totaled $1.44 billion.

The Blue List, a measure of secondary dealer holdings, has declined four consecutive days, dropping $490 million in that span.

Looking ahead, incoming deals have also slowed. The Bond Buyer calculated 30-day visible supply at $4.96 billion, down from $5.96 billion Monday.

New York City Deal

Topping the negotiate new issue sector, New York City sold approximately $300 million general obligation bonds through two syndicates led by Grigsby, Brandford, & Co. and Pryor, McClendon, Counts & Co.

The deals marked the first time New York City has tapped minority-owned firms as bookrunning senior managers for a general obligation bond offering.

Grigsby priced and repriced $154 million of serial bonds. At the repricing, yields were lowered by five basis points. The final scale included serial bonds priced to yield from 3.65% in 1995 to 5.75% in 2007.

Pryor priced and repriced $145 million serial bonds to lower yields five to 10 basis points throughout the loan. The final scale included serial bonds priced to yield from 5.80% in 2008 to 5.90% in 2017.

Moody's Investors Service rate the bonds Baa1, while Standard & Poor's Corp. and Fitch Investors Service rated them A-minus.

In other new issue activity, deals were generally well received and underwriters were able to raise prices because of demand.

Smith Barney Shearson priced and repriced $239 million airport system revenue bonds for the Louisville and Jefferson County, Ky., Regional Airport Authority.

At the repricing, yields were lowered by two basis points in the Series B 2023 term bond. Yields were raised by five basis points on Series C bonds from 1999 through 2003 and by two basis points in 2023.

The final offering included $24 million Series A bonds priced at par to yield from 2.85% in 1994 to 5.40% in 2007 and 5.60% for term bonds in 2013.

There were $9 million of Series B bonds priced at par to yield from 4.30% in 1998 to 5.40% in 2007 and 5.60% for term bonds in 2013 and 5.621% in 2023.

The bulk of the airport loan, $205 million Series C bonds, is subject to the federal alternative minimum tax. Serial bonds were priced to yield from 3% in 1994 to 5.55% in 2007. A 2013 term was priced as 5 1/2s to yield 5.70% and a 2023 term, containing $80 million, was priced as 5.40s to yield 5.773%.

The issue is insured by the Municipal Bond Investors Assurance Corp. and rated triple-A by Moody's and Standard & Poor's.

Lehman Brothers as senior manager priced and repriced $135 million transportation revenue bonds for the Northern Virginia Transportation District program.

Yields were lowered by four to as much as eight basis points throughout the loan.

The final offering sold through the Commonwealth Transportation Board, included serial bonds priced to yield from 3.30% in 1995 to 5.42% in 2010. A 2012 term was priced as 5 3/8s to yield 5.428%; a 2015 term was priced as 5 1/2s to yield 5.569%; and a 2019 term, containing $33 million, was priced as 5 1/4 s to yield 5.543%.

The bonds are rated double-A by Moody's and Standard & Poor's.

In the competitive sector, Merrill Lynch & Co. won $140 million Hillsborough County, Fla., capital improvement program refunding revenue bonds, bidding a true interest cost of 5.2698%.

The firm reported an unsold balance of about $29 million late in the day.

Serial bonds were reoffered to investors at yields ranging from 2.60% in 1994 to 5.45% in 2014. A 2016 term bond, containing $19 million, was priced as 5 1/4s to yield 5.50%.

Bonds from 2008 through 2010 and in 2012 were not formally reoffered to investors. The deal is insured by the Financial Guaranty Insurance Co. and rated triple-A by Moody's, Standard & Poor's, and Fitch.

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