Expect higher municipal yields this week, market players advise, as the Street executes a full retreat to relieve intense supply pressure.

Tax-exempt prices fell three to four points on average last week as a deluge of bonds, built up over the last several months, depressed both the primary and secondary sectors of the market.

To make matters worse, the overwhelming supply combined with jitters about the outcome of the upcoming presidential election.

Weary market players gave up hopes for bullish news and sold bonds - and they expect to sell more.

"The market is beat up and tired and they want relief," said the head of a major Wall Street based firm Friday. "The only way to do that is to try to get rid of bonds."

But, even though the market has adopted a decidedly bearish psychology, traders note that the damage could have been worse.

Last Thursday and Friday traders estimated nearly $400 million in bid-wanted product, the largest number of bonds for sale in some time and a potential market crusher.

But bids for items on the list were said to be respectable, reflecting some willingness by players to buy bonds.

Traders also worried funds were selling to meet upcoming redemption costs, another potential hazard for bond prices. But several market observers said Friday they do not expect a wave of redemption-cost related selling.

"It's not a case that [funds] are running scared and think checks need to be written to meet redemption costs," said a fund analyst, who preferred not to be named.

"Clearly, funds have been doing lists, but it's more a case where they're looking at bonds that won't survive a back up in rates and trying to find a new home for them," he said.

Still, traders note that perception can be more important than fact on a day-to-day basis.

"The ~R-word' is out there," a trader said Friday, referring to redemptions. "It's another negative factor on people's minds."

Heavy Supply This Week

Looking ahead, The Bond Buyer calculated 30-day visible supply at $8.27 billion, and $7.3 billion of bonds and notes are expected to be priced this week alone.

Reflecting increased supply in the secondary market, The Blue List rose $43.4 million to a hefty $1.93 billion.

Market observers say the new bonds are only expected to add to technical pressure, unless the government market sustains a significant rally, which is not likely.

"The next two weeks are going to be tough," said George D. Friedlander, head of research at Smith Barney, Harris Upham & Co. "Uncertainty from the election and supply problems will reach a crescendo. The dealer community's attitude has been that they want it to all go away. That's not going to happen."

The negotiated calendar features $500 million of Los Angeles County Transportation Commission Proposition C sales tax revenue second senior bonds, to be priced by Lehman Brothers; $241 million of Texas Water Development Board state revolving fund senior lien revenue refunding bonds, to be priced by Kidder, Peabody & Co.; and $160 million of Northern California Power Agency multiple capital facilities revenue refunding bonds, also to be priced by Lehman Brothers.

Lehman Brothers also is expected to price $126 million of tax-exempt variable-rate New York City general obligation bonds. Kidder Peabody is planning to price $75 million of taxable city variable-rate GOs.

The competitive slate features $180 million of Connecticut various purpose bonds and $102 million of Dallas various-purpose bonds.

Outside Factors

This week the markets face a full slate of economic indicators and government auctions, although supply is likely to remain the muni market's main obstacle, traders said.

"Nobody is thinking about the economy right now, but they will if a surprise happens," a trader said Friday.

Tomorrow, the Commerce Department releases the advance estimate of third-quarter gross domestic product. On Wednesday, September durable goods and personal income and spending data will be released. On Thursday, initial jobless claims for the week ending Oct. 17 will be reported.

And on Friday, the Commerce Department reports on single-family home sales during September.

Friday's Market

Traders said bond prices declined 1/2 to as much as one point Friday, depending on the name of the bond.

In the debt futures market, the December contract closed down 19/32 to 93.23.

Secondary activity was muted as the market dropped, but traders reported another retail bid-wanted list.

In secondary dollar bond trading, California GO 6 1/4s of 2019 were quoted at 6.65% bid, 6.60% offered: New York City Water and Sewer 6 3/8s of 2022 were quoted at 94 1/2-94 7/8 to yield 6.808% on the bidside; and Washington Public Power Supply System 6 1/2s of 2015 were quoted at 96 1/2-97 to yield 6.804%.

Puerto Rico GO 6s of 2014 were quoted at 92 1/4-3/4 to yield 6.681%; Denver Airport Authority AMT 6 3/4s of 2022 were quoted at 93-93 1/2 to yield 7.331%; and Florida Board of Education 6s of 2025 were quoted at 92 1/4-3/4 to yield 6.579%.

In the short-term note sector, yields were mixed on the day.

In late trading, Los Angeles tax and revenue anticipation notes were quoted at 2.90% bid, 2.88% offered, New Jersey Trans were quoted at 2.88% bid, 2.85% offered, and Texas Trans were quoted at 2.90% bid, 2.85% offered.

Texas Water Board Bonds

The Texas Water Development Board Friday approved the sale of $241 million of state revolving fund senior lien revenue bonds.

The issue, the board's first long-term fixed-rate offering, is rated Aa by Moody's Investors Service and AAA by Standard & Poor's Corp.

Proceeds from the issue will be used to purchase municipal bonds for loans to local governments throughout the state to finance wastewater treatment projects.

Kidder, Peabody & Co. will serve as senior manager on the deal, which is expected to be priced this week and close in November.

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