Municipals suffered less than Treasuries on Friday as a robust employment picture heightened prospects for another credit tightening by the Federal Reserve.

"I would say it's down 3/8 to 1/2 on the bid side, but not much is trading," a municipal trader said at late morning on Friday.

"I trade the serial sector, and we're down about 1/2 to 3/4," a second trader said near day's end. He also cited "very light" trading.

A municipal analyst said yields on highgrade issues rose by five basis points, while dollar bonds closed down 1/2 point overall and more in spots. The 30-year Treasury bond fell 7/8 point to yield 7.68%.

While Fed-time passed without action Friday, traders see tighter credit ahead.

"We thought that they were going to wait for G7 anyway, and that it will be in the next week or two," one trader said. The Group of Seven economic summit got underway in Naples on Friday.

In debt futures, the September municipal contract lost nearly one point Friday to settle at 88 3/4. Friday's September MOB spread was negative 378, compared to negative 382 on Thursday.

While the unemployment rate held steady at 6%, nonfarm payrolls increased by an unexpected 379,000 jobs in June. Expectations had been for an increase of about 285,000, though some economists had predicted an increase of 300,000 or better.

"It's bad," Larry Wachtel, a market analyst at Prudential Securities, said of the report, adding, however, that "there were some shadings to it."

For one thing, the June survey covers five weeks instead of the usual four, Wachtel said. The Labor Department estimated that the extra week added roughly 100,000 jobs to the total, he said. In addition, Labor Secretary Robert Reich said that the nation is nowhere near full employment.

"I don't think the Fed's going to tighten immediately, but the bond market is beleaguered by the fact that the economy is strong," Wachtel said just prior to the Fed's usual intervention time.

Wachtel sees another Fed tightening coming at the next FOMC meeting on Aug. 16. If there is action before that, it would have to be triggered by some event such as unfavorable consumer price or producer price indexes, or by having manufacturers' capacity utilization hit 85%.

John Lonski, senior economist at Moody's Investors Service, said that the June employment report "tells us that the current pace of economic activity is strong enough to rule out a significant decline by bond yields in the near future."

With the biggest jobs increases clustered in the retail and personnel services areas, Lonski said, the inflationary impact of the increased jobs growth seems worse than it is.

The report, however, does offset some earlier economic news that hinted at a slowdown.

"What the employment report of June tells us is that the retreat by retail sales in April and May as well as the slowdown in industrial production were aberrations," Lonski said.

As for credit tightening prospects, if the core consumer price index this week grows by at least 0.4%, Lonski sees a good chance that the Fed will move.

A municipal trader said while rates are likely to go higher, municipals remian in good technical shape and should fare better than Treasuries.

The wild card is what happens with the flow of cash into municipal mutual bond funds, he said.

Robert W. Chamberlin, a senior vice president and supervisory municipal analyst at Dean Witter Reynolds Inc., concurred that municipals should outperform Treasuries.

"You are working with a very narrow market now," Chamberlin said, citing "some back off in the Blue List balance," and the paltry amount of new municipal debt that arrived last week.

"I think that the trend underlying all of this is the number of ... individual retail sales coming out of the secondary market," Chamberlin said. The pickup in sales in the secondary market takes longer to register than a comparable uptick in the pace of new issue sales, "which tend to be heavily institutionally oriented," he said.

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