Traders ran a gauntlet of hostile economic news yesterday, while underwriters encountered stubborn buyers in the primary.

The market got off to a rough start after it was surprised by a big jump in housing starts.

The December municipal contract fell 20/32 after it was reported housing starts surged 7.8% in August, to a seasonally adjusted annual rate of 1.32 million units, the highest level in 3 1/2 years.

Dealers said they saw a slew f bid-wanteds after he housing report, reflecting the overall fear of a big sell-off after the recent run to records highs. One dealer estimated that there were $220 million of bonds for sale by 1:30 p.m., eastern time. Players also were trying to unload sizable blocks of bonds, he said, reflecting their eagerness to liquidate positions.

"The customers are very nervous and there are a lot of sneaky sellers in this market," one trader said. "You're seeing The Blue List climb rapidly, even though we haven't seen much supply recently."

The Blue List of dealer inventory rose $185 million, to $1.68 billion yesterday. Thew list has risen eight consecutive days and is at he highest level since Aug. 26 when it was $1.79 billion. But the tax-exempty skies brightened around mid-session, thanks to a solid Treasury market, which showed a muted response to the housing report.

Government bonds were back in positive territory by mid-morning, lifted there by a big buyer and hopes for a good 2-year auction.

Firm Treasury bids helped stem the flow of bid-wanteds in the municipal arena and prices regained ground.

But matters grew sticky again when underwriters stepped in with new deals and customers gave the issues a cool response, wary of the market's fragility.

The bid for secondary bonds began to fade again in earnest after the credit markets took hits from news of turmoil in Russia and a 2.6% jump in Johnson Redbook retail sales.

The selling pressure increased and traders said they began to retreat from he fray.

"Up until now its been an orderly retreat from the highs," a trader said. "But now they're ready to give up and run. The bid side is gone, there's no money to be made here."

By session's end, tax-exempts were quoted down 1/2 point on the day and the tone was heavy.

In the debt futures market, the December municipal contract settled down 17/32 to 103.14, just off the low of 103.14.

Despite yesterday's losses, some traders noted that the market has already lost about 20 basis points and that some stability could be found at these levels.

"I think the trend is down, but not straight down," one trader said. "If you can stay on top of your game you can eke out some gains here. If you make a mistake though, it's very expensive."

New Deals

Market players said buyers were not as abundant as they had hoped and underwriters were forced to raise yields on many of the new issues priced yesterday.

Topping the negotiated slate, an 11-member syndicate led by Kidder, Peabody & Co. tentatively priced $418 million Puerto Rico Housing Bank and Finance Agency non-callable refunding bonds.

Details on the sale were unavailable late yesterday, but the deal had not been repriced or restructured before the end of the session.

The tentative offering included $330 million subsidy prepayment refunding bonds priced to yield from 2.70% in 1993 to 5.25%. Bonds in 2006 were not formally reoffered to investors. There also was $89 million of loan insurance claims refunding bonds priced to yield from 2.70% in 1993 to 5.35% in 2006.

The bonds are rated Baa by Moody's Investors Service and BBB by Standard & Poor's Corp.

Elsewhere, First Boston Corp. priced and repriced, $178 million New York State Project Finance Agency bonds, by HUD Section 236 payments.

At the repricing, reoffering yields were raised by five basis points in 2004, 2005, and 2006.

The final scale was made up of serial bonds priced at par to yield from 2.90% in 1994 to 5% in 2007.

The bonds are insured by the Financial Security Assurance Inc. and rated triple-A by Moody's and Standard & Poor's.

In a separate deal, First Boston priced and repriced $65 million more HUD backed New York HFA bonds, subject to the federal alternative minimum tax.

Yields were raised by 10 basis points in 2008 and 2014 and by five basis points from 2009 through 2017.

The final scale was made up of serials priced at par to yield from 3.10% in 1994 to 5.85% in 2017.

The deal is also backed by FSA and rated triple-A by Moody's and Standard & Poor's.

Morgan Stanley & Co. priced and later restructured $96 million New York State Housing Finance Agency service contract obligation revenue bonds.

A 2011 maturity was added to the Series D scale and a 2009 maturity was added to the Series F bonds.

The firm said it received the verbal award at the original price levels.

The offering included $47 million Series D bonds priced to yield from 5.20% in 2004 to 5.45% in 2007. A 2013 term was priced as 5 1/2s to yield 5.65% and a 2023 term was priced as 5 1/2s to yield 5.729%. There also were $44 million Series F refunding bonds priced to yield from 4% in 1996 to 5.45% in 2007 and 5.63% in 2011.

The bonds are rated Baal by Moody's and BBB by Standard & Poor's.

Smith Barney Shearson priced and repriced $95 million South Texas Higher Education Authority student loan revenue refunding bonds, subject to the federal alternative minimum tax.

Yields were raised by five basis points on Series 1993-A-1 bonds in 2001, 2002, and 2003.

The final offering included $82 million Series 1993A-1 bonds priced at par to yield from 3.60% in 1995 to 5.10% in 2003 and $13 million Series 1993A-2 bonds priced at par to yield 5.30% in 2003. Moody's rated the bonds A.

Secondary Markets

Traders said sizable blocks of bonds changed hands throughout the day, until the bid side deteriorated late in the day. Players were scarce as the market gapped lower, they said.

In secondary dollar bond trading Guam 5.40s of 2018 were quoted at 98 1/4-3/4 to yield 5.53%; South PUB 5 1/8s of 2032 were at 5.56% bid, 5.54% offered; and Washington Public Power Supply System 5 3/8s of 2015 were 5.65% bid, 5.63'% offered.

Florida MPA AMBAC 4 1/2s of 2027 were quoted at 87 1/4-bid to yield 5.31%; Jacksonville Electric 5 1/4s of 2021 were at 5.45% bid, none; and New York State Power 5 1/4s of 2018 were 98 5/8-7/8 to yield 5.35%.

In the short-term note market, yields were unchanged to five basis points lower on the day.

In late action, California Rans were quoted at 2.90% bid, 2.85% offered and New York State Trans were quoted at 2.63% bid, 2.50% offered.

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