Prospects for rally fizzle out quickly when bear facts become apparent.

Profit takers sapped the market's will to rally yesterday, but players said sentiment remained positive overall.

Municipals opened unchanged to 1/8 point weaker as strength from rally sparked late last week by positive inflation reports fizzled. The credit markets were then hit with a round of negative news, prompting sellers to take profits throughout the session.

First, Treasury bonds began to sink after a USA Today story featured economist who called for higher bond yields. Later, Morgan Guaranty Trust slashed its prime rate, prompting speculation that widespread rate cuts could stimulate the economy and force yields higher. Then, the latest survey by the National Association of Home Builders showed an improving building sector. The report said 41.8% of the builders surveyed called traffic in October "good to very good" up from 31.4% in September.

Finally, confidence in low inflation levels was challenged by a rising Commodities Research Bureau Index, with gold leading the way.

Municipal traders reported a weaker tone but little action. There was secondary selling, with some bid-wanted lists. Traders said there was one retail list of around $50 million, by one firm's estimate. Last week, the same dealer said about $700 million of bonds, mostly pre-refunded paper, was up for sale.

By session's end, debt futures prices cash lower. The December municipal contract settled on its low of the day, down 15/32 to 105.31. The MOB spread narrowed to negative 478 from negative 496 on Friday as municipal futures held in against big-Cash bigger losses in the Treasury futures pit. Cash prices were quoted down 3/8 point on average, traders said.

In secondary dollar bond trading, Valdez, Ala., 5 1/25 of 2028 were quoted at 100 1/4-1/2 to yield 5.47% to the par call; Ohio Building Authority 4 3/4s of 214 were at 5.16% bid, 5.13% offered; and Atlanta 4 3/4s of 2023 were 5.18% bid, 5.16% offered.

Connecticut Health and Ed. 5s of 2023 were quoted at 97-3/8 to yield 5.19%; New York City Group C 5 3/8s of 2022 were at 5.64% bid, 5.61% offered; and Salt River 4 3/4s of 2017 were 5.16% bid, 5.14% offered.

In the short-term note market, yields were mostly unchanged on the day, traders said. In late action, California Rans were quoted at 2.68% bid, 2.65% offered; New York State Trans were at 2.50% bid, 2.45% offered; and Texas Trans were 2.69% bid, 2.65% offered.

The losses caused some players to challenge the notion that yields will continue lower on a soft economy, as many Wall Street professionals were recently preaching.

"The market is feeling very tired right here," a trader said. "There really nothing in the Street that is sexy and we get a lot of apathy when that happens. Nobody cares and it takes its toll on the market."

But the skeptics were largely overruled by a gamut of players who see yields sticking to a relatively narrow range through the end of the year.

"We've seen very little evidence that the economy is reviving at anything but a very slow pace," said James L. Kochan, head of fixed-income research at Robert W. Baird. "There's no reason to believe that will change as long as the Federal Reserve Board doesn't tighten monetary policy."

Kochan noted that the only sector of the economy that has seen brighter days is the building sector, but that, he added, isn't enough to force the Fed to snug policy.

"Since there is no sign of an imminent Fed move market sentiment has not changed," Kochan said. "We're seeing some profit taking, but we should continue to see a weak economy that will keep the 30-year Treasury bond between 5 1/2% to 6% through the year-end."

Municipals typically lag Treasury gains and that has recently held true. Supply remains the market's main challenge and dealer will watch the results of today's issues to gauge investor demand.

Buyers have been reluctant to take down new paper at the aggressive prices pushed by dealers, even though municipals are quite cheap to other securities. That scenario appeared to shift late last week as the rally gained momentum, but buyers may still dig in their heels, dealers said, as current low interest rates will likely attract more supply.

The Bond Buyer calculated 30-day visible supply at $5.16 billion, up from $4.93 billion of Friday.

Massachusetts plans to open bids today for $200 million general obligation bonds. Dealers said they expect the bids to be strong. They said late yesterday a paucity of the state's paper would drive demand, although the recent upgrade by Standard & Poor's Corp. would also help the sale.

Hawaii plans to market $570 million general obligation bonds this week. Merrill Lynch & Co. will serve as sole manager on the deal. Both new money and refunding bonds will be sold, according to the firm.

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