A Treasury rally and reduced supply combined to drive prices up 1/4 point on average yesterday, but impending supply curtailed gains.

Municipal market players last week were counting, on a strong Treasury market to lend enough strength to underwriters to successfully sell record issuance that posed a serious - threat to bond prices.

But, until yesterday, the government market failed to make any real gains and tax-exempt prices fell steadily and yields rose. Trading ground to a near halt by Wednesday and yields rose, forcing some underwriters to delay or postpone around $5.4 billion of new deals.

The lightened load in the primary sector combined with the Treasury rally Yesterday to push tax-exempt bond prices 1/4 point higher on average, to as much as 1/2 point higher, depending upon the bond.

"The market feels like it wants to do better for the first time this week," a trader said late in the session. "But people are afraid to pull the trigger. We're going to have to wait and see if the government market keeps its gains or gives up the ground."

In the debt futures market, the December municipal contract rose 11/32 to settle at 95.25.

The MOB spread widened to negative 283 from negative 268 Wednesday, eradicating Wednesday's gains and nearly returning to its Tuesday level of negative 285.

Despite the renewed strength. traders said the sizable deals postponed this week are likely to reappear as rates fall. Therefore, bond prices are not likely to move significantly higher until more supply is eradicated or Treasury prices continue to rally and establish a higher price range.

Looking ahead to supply. The Bond Buyer calculated 30-day visible supply at $7.53 billion yesterday, good news for supply-strapped bond prices.

But The blue List of dealer inventory's rise from $99.6 million to $1.49 billion, indicating that dealers are retaining a considerable amount of new issue product, is likely to dampen any price side.

Over the long run, traders are hoping that crossover buyers will enter the municipal market, which is cheap relative to governments.

In addition, market players are counting on investor demand to increase by Oct. 1, as bond redemptions flood the market with between an estimated $5 billion to $7 billion in cash.

On the political front, several traders argued that demand for tax-exempts would also increase if Democrat Bill Clinton gained t4e White House. The traders said they believe investors will buy municipals to seek shelter from higher taxes expected under his administration.

New Issues

Leading negotiated action, a syndicate led by Goldman, Sachs & Co. priced and repriced $541 million of Ohio Water Development Authority water development revenue bonds, pure water refunding and improvement series.

At the repricing, yields in 1993 through 1997 were lowered by five to 10 basis points, while the yield on bonds in 2008 was lowered by about two basis points.

The final reoffering scale included serial bonds priced to yield from 3.20% in 1993, to 6.10% in 2006. A 2008 term maturity was priced as 6s, to yield 6.20%; a 2011 term, containing $69 million of the loan, was priced as 5 1/2s, to yield 6.25%; and a 2018 term was priced as 5 1/2s, to yield 6.30%.

Most of the bonds are rated A by Moody's Investors Service and Standard & Poor's Corp. Bonds maturing in 1998 through 2006. which are insured by the Municipal Bond Investors Assurance Corp., and the term bonds, which are insured by the AMBAC Indemnity Corp., are triple-A rated by both ratings agencies.

In the competitive sector, an issue of $146.41 million of New Jersey revenue certificates of participation was won by a Lehman Brothers group, with a true interest cost of 4.7314%. The firm reported all COPS sold by late afternoon.

The offering included serials priced to yield from 3.20% in 1993 to 5% in 1997.

The issue is rated A1 by Moody's and AA by Standard & Poor's.

In follow-through business, First Boston Corp. reported an unsold balance of $70 million from the $190 million of New York State GOS priced Wednesday.

Market sources said bond yields on the deal were cheapened yesterday as much as 10 basis points in some cases.

Traders reported a substantial amount of bid-wanteds in the secondary market, as well as a bid list out from an insurance company.

However, the rally in governments made for a strong tone and dollar bonds made gains of to 1/2 point, depending upon the name.

In late trading, Chicago AMBAC 5 7/8s of 2022 were quoted at 93-3/4, to yield about 6.404% on the bidside; Puerto Rico GO 6s of 2014 were quoted at 95 1/4-3/8, to yield 6.407%; and New York City Water Authority 6s of 2017 were quoted at 92 3/4-93 1/4, to yield 6.597%.

Denver Airport Authority AMT 6 3/4s of 2022 were quoted to 96 3/8-5/8, to yield 7.041%; Los Angeles Department of Water and Power 6s of 2032 were quoted at 94 7/8-95 1/2, to yield 6.354%; and Florida Board of Education 6s of 2025 were quoted at 95 1/2-1/4, to yield 6.355%.

Short-term note prices outperformed the rest of the market. Yields dropped five basis points on the day.

Yields have dropped about 15 basis points, over the last three sessions as retail investors take advantage of cheap prices.

In late trading yesterday, Los Angeles tax and revenue anticipation notes were quoted at 3% bid, 2.95% offered; Texas Trans were quoted at 2.98% bid, 2.95% offered; and Wisconsin notes were quoted at 3% bid, 2.95% offered. New York State Trans were quoted at 3. 1 0% bid, 3.05% offered and Pennsylvania notes were quoted at 2.95% bid. 2.90% offered.

California Ratings Affirmed

Standard & Poor's yesterday affirmed the A-plus rating on the state's $12.5 billion of outstanding general obligation debt.

At the same time, an SP-1 rating was assigned to California's $4 billion of fixed-rate revenue anticipation notes, scheduled for sale next, week.

The state will also sell $1 billion of variable-rate notes, but Standard & Poor's said the securities remain under review pending the evaluation of a standby purchase agreement provided by a consortium of banks.

The move comes after Standard & Poor's affirmed the various ratings on about $2.8 billion of the state's agency and public works board lease obligations and removed them from Creditwatch, where they had been placed on Aug. 25 with negative implications.

Lehigh IDA Redemption

Pennsylvania Power & Light Co. disclosed yesterday it is considering a plan to ask the Lehigh County Industrial Development Authority to redeem at 102% of the principal amount a bond issue sold for the utility in 1980.

The bonds, the authority's pollution control revenue bonds 1980 Scries B, would be redeemed under the optional redemption provisions of the indenture before the next interest payment date on April 1, 1993.

Bondholders, who will be sent additional information on the redemption proposal, were advised to contact the trustee, Mellon Bank of Pittsburgh.

N.Y.C. Water Authority

New York City finance officials are working on the details of a $200 million to $300 million bond deal for the New York City Water Finance Authority to be sold next month, a source with knowledge of the deal said yesterday.

The authority is expected included about $100 million of variable-rate securities in the offering - the authority's first variable-rate issue. A syndicate led by Smith Bamey, Harris Upham & Co. is slated to price the deal in carly October, the source added.

In addition, the source said the city may also refund some water authority bonds as part of the deal. Mark Page, the authority's executive director and deputy director of the city's office of management and budget. did not return telephone calls.

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