Municipals ended a quiet post-July 4 session yesterday unchanged to slightly higher.

"There were some lists and really nothing going on -- just as dead as it could be," a municipal analyst said.

A trader called "very, very quiet," and "the typical start of a July month."

"There's some bottom fishing," another municipal trader said, "People [are] trying to buy bonds at distressed levels." Much of the bargain hunting appeared to be taking place in the long end, he said. He also noted "a fair amount of institutional selling."

Richard Ciccarone, executive vice president and director of tax-exempt fixed income research at Kemper Securities Inc., said he's seen a "proliferation of bid lists in the past two weeks."

The main reason behind the selling is the anticipation of higher rates, Ciccarone said. The bid lists also may signal that bond funds fear shareholder redemptions because of those higher rates, and are raising cash, he said.

Given the selling, the current market does offer opportunities for buy--and-hold retail investors to upgrade their portfolios.

Municipals are now trading at "very favorable" taxable equivalent yield levels, they are in a "neutral" position relative to Treasuries, and the amount of available supply has increased due to excess secondary market supply, Ciccarone said.

While supply is currently available, the much discussed scarcity factor in municipals will eventually come into play, Ciccarone said. "The theme of 1994 is the theme of scarcity," he said.

Ciccarone also said that while it's possible that a 7.75% or 8% long Treasury bond may be seen, he believes rates will start to come back down later this year as confirmation of economic slowdown stabilizes the bond market.

Robert Adler, president of AMG Data Services in Arcata, Calif. said the weeks ended June 22 and June 29 have seen a total of nearly $900 million of outflows from municipal bonds mutual funds.

While it is noteworthy that outflows are occurring, "on an absolute basis those numbers are not big at all," Adler said. He added, however, that "Eighty percent of those net redemptions have occurred in no load funds."

Market Activity

In secondary activity yesterday, yields on high-grade issues ended unchanged. Dollar bonds ended slightly higher, finishing up roughly 1/16 overall. In the Treasury market, the 30-year bond ended 1/8 point higher to yield 7.58%.

In debt futures, the September municipal contract settled up more than 1/2 point at 89 21/32. Yesterday's September MOB spread was negative 383, compared to negative 391 on Friday.

While much has been made of the Federal Open Market Committee meeting that began yesterday and continues today, traders said they thought it unlikely that the Federal Reserve would tighten monetary policy before seeing Friday's June employment report.

One trader said that while he expects little to come out of the FOMC, the meeting, combined with Friday's employment report provide participants with good reason to tread cautiously. A municipal analyst also pointed to this weekend's Group of Seven economic summit in Naples as another reason for caution.

Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson Inc., sees a slightly better that even chance that the Fed will act today.

"I'm basically sixty-forty," Wesbury said, adding that the odds slide to fifty-fifty if as Friday nears no action has been taken. Of late, Fed officials have shown adopted a more open policy as far as their actions go, and they are aware that the longer they delay the more tension it creates for the bond market, he said.

"There's no reason in my mind to wait until Friday," Wesbury said, adding that higher gold prices, the weak dollar, as well as higher oil and raw industrial commodities prices provide the Fed with enough reason to act.

"I think they need to step on the brakes before things do get out of control," he said.

The economist said the nonfarm employment number by itself is insufficient to spur a Fed move, unless it comes in significantly higher than expected.

The consensus calls for nonfarm payrolls to increase by 200,000 to 350,000 jobs. Wesbury predicts a 285,000 increase, "so I'm a little bit higher than consensus."

If the Fed does tighten, Wesbury envisions a 25 basis point hike in both fed funds and discount rates.

Wesbury conceded that no action is also possible. In a New York Times article that appeared about a month ago, three Fed governors, Edward Kelley, Lawrence Lindsay, and John LaWare, indicated that they believe inflation is stable, and at this point no further moves are needed, he said.

In other news yesterday, dealer inventories managed to get below the $2 billion mark as Standard & Poor's Corp's Blue List slipped $3 million to $1.99 billion from $2.02 billion on Friday. That's the first time the list has been below $2 billion since June 17, when it was also $1.99 billion.

The 30-day visible supply of municipal bonds for today totals $2.37 billion, up $70.3 million from yesterday. That comprises $1.415 billion of competitive bonds, up $102.1 million from yesterday, and $957.6 million of negotiated bonds, down $31.8 million from yesterday.

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