Inflation fears continued to batter municipal bond prices this week, but Tuesday's powerful one-day rally offset the rest of the week's losses and left The Bond Buyer's bond indexes only slightly above or below last Thursday's levels.

The 20-bond index of general obligation bond yields was squeezed one basis point higher this week, to 5.46% yesterday from 5.45% last Thursday. The 20-bond index has not been that high since Aug. 5, when it was 5.61%.

The 11-bond GO index edged two basis points higher, to 5.36% from 5.34% last Thursday. That was the highest level since Aug. 12, when the index was 5.36%.

Revenue bond prices were able to hold onto more of Tuesday's gains, as the 30-year revenue bond index declined three basis points, to 5.69% from 5.72% last Thursday. A bond trader noted that the glut of general obligation bonds over the past few weeks has hurt GO bond prices more than revenues.

The average yield to maturity of the 40 bonds used to calculate the daily Municipal Bond Index, which is comprised mainly of revenue bonds, decreased one basis point, to 5.60% from 5.61% last Thursday.

U.S. Treasury prices moved the same distance as GOs, as the yield on the bellwether 30-year bond rose one basis point, to 6.20% from 6.19% on Nov. 4.

Municipal bond prices staged a sharp rally Tuesday after the Labor Department reported that producer prices fell 0.2% in October, and that the "core" price index, which excludes volatile food and energy components, declined 0.5%. Analysts had expected a 0.3% overall increase and a 0.2% gain in the core rate. Economists generally agreed that the PPI report showed the economy's sluggish growth lacked the muscle to push prices higher.

Yesterday, however, the market slumped after hearing that the consumer price index posted a 0.4% gain in October. The core CPI, excluding food and energy, increased 0.3%, slightly more than the consensus forecast of a 0.2% increase.

Although the CPI was close to expectations, coming on the heels of the surprise decline in PPI, the municipal and government markets found the news "disappointing," according to one Treasury market watcher.

"The market's rally in the last several months has been predicated on the belief that inflation was moving lower," an economist said. "The CPI report certainly doesn't show that to be true."

The municipal bond market has been aided somewhat by an easing in supply pressures, especially in the secondary market. Standard & Poor's The Blue List declined $320 million during the week, to $1.66 billion yesterday from $1.98 billion last Friday, and is now at its lowest level since Oct. 19, when it was $1.42 billion. Similarly, The Bond Buyer's 30-day visible supply fell $350 million during the week, to $5.07 billion yesterday from $5.42 billion last Friday.

The Bond Buyer's one-year note index fell two basis point this week, to 2.73% from 2.75%.

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