Treasury market strength helped push municipal cash prices higher yesterday in a thinly traded post-holiday session. Futures also gained.

"There has probably been only a handful of trades," a municipal trader said.

Said another trader: "It doesn't take much on either side, the buy side or the sell side, to move the market."

Yields on high-grade bonds fell by three basis points overall, and by five basis points from the long-intermediate range on out, according to one analyst. Dollar bonds gained 1/2 point, he said. Much of those gains were on quotes, he added.

In the government market, the 30-year bond rose more than 3/4 point to yield 7.75%. In debt futures, the March municipal contract closed up 27/32 to settle at 86#/3/32. Yesterday's March MOB spread was negative 468, compared with negative 466 on Friday.

Traders said that while activity was limited yesterday and gauging levels was difficult, what action did take place was seen largely in the insured market.

"It's the most liquid part of the market -- that's the commodity part of the market," said one trader.

Another trader said tax swapping accounted for what little activity there was yesterday.

In addition to the boost municipals got from governments yesterday, another trader pointed to the lack of supply.

[CHART OMITTED]

PSA-Indexed Municipal Swap RatesTerm Dealer Receives PSA Index Dealer Pays PSA Index(Years) & Pays Fixed Rate of: & Receives Fixed Rate of: 2 5.50% 5.60% 3 5.55 5.65 4 5.58 5.68 5 5.65 5.75 7 5.65 5.76 10 5.66 5.78

Rates are representative midmorning interdealer swap prices on Dec. 23 using a quarterly net interest payment and weekly reset structure. The PSA Index in effect on that date was 5.24%.

According to MuniView, $30.1 billion of debt is expected to exit the municipal bond market next month. In addition, January is also expected to bring another tightening by the Federal Reserve.

Meanwhile, John Lonski, senior economist at Moody's Investors Service, said the U.S. credit markets benefited as investors steered money away from securities issued by developing countries.

"After what has happened with the Mexican peso and recent difficulties with the Chinese repayment of outstanding obligations, investors may be reconsidering their purchases of financial assets from developing dynamic economies," Lonski said.

"I think it's much too premature to credit the gains in the bond market to the long-awaited arrival of a much slower-than-expected pace of economic activity," Lonski said.

The economist pointed to yesterday's Johnson Redbook survey, which showed a 3.3% gain for the first four weeks of December over November.

Lonski said that the job market remains "pretty strong," which is reflected by the employment component in yesterday's consumer confidence survey. In addition, sales of durable goods, especially electronics, thrived during the holiday season, he said.

"PC sales were up 33% year over year," Lonski said. "That is hardly indicative of weakness."

In other economic news yesterday, sales of existing homes declined 2.6% to a seasonally adjusted rate of 3.81 million in November, the biggest decline of the year. The decline follows a 0.5% gain in October.

Lonski said the rise of the Federal Home Loan Mortgage Corp.'s 30-year mortgage rate to 9.17% in November. may have slowed sales in November.

"I think that in December that [yield] will probably fall by, oh, roughly 15 basis points," he said.

In addition, the supply of existing homes dropped 17.6% from November 1993 to November 1994.

"Quite possibly, the deep drop in the number of homes available for sale might be reducing housing activity in addition to higher mortgage yields," he said.

The 30-day visible supply of municipal bonds yesterday totaled $1.02 billion, up $76.5 million from Friday. That comprises $557.2 million of competitive bonds, up $76.5 million from Friday, and $464.1 million of negotiated bonds, unchanged from Friday.

Standard & Poor's Corp.'s Blue List of municipal bonds was down $39.9 million yesterday, to $1.81 billion.

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