A supply glut pushed tax-exempts 1/2 to one point lower yesterday, and the weak tone was exacerbated by the possibility of tax cuts and military action in Iraq.

Municipals suffered from indigestion all last week, and the steady price erosion continued yesterday as bonds from new deals flooded the Street.

Also clouding near-term price prospects were the possibility the U.S. could resume military action against Iraq and speculation that the White House may move for lower taxes.

But supply was the primary force behind the market's decline, and issuers show no signs of backing away from yields that are still attractive. The Bond Buyer calculated 30-day visible supply at $7.83 billion yesterday, while The Blue List of municipal bonds totaled $1.66 billion.

Weary of the continuous waves of new bonds, market players hit the sidelines about midsession yesterday. Traders reported a fair amount of selling in the secondary, but with few buyers in sight, the Street was content to wait to assess levels of the next new-issue assault.

"We're in a cycle where we take on a lot of supply Tuesday and Wednesday, and then you're stuck trying to go bid-wanted later in the week when nobody wants to make a move," a trader said. "The Street has had enough, and we're trapped in this scenario until more investor cash comes back to the system."

"There are some situations out there, but, generally, nobody is willing to step up and pet the pony" another trader echoed. "Nobody will take a lead, so all you can do is sit here and take your punishment and wait for new deals."

By session's end, prices were quoted down 1/2 to more than one point in spots.

In the debt futures market, the September municipal contract settled down 23/32 to 97.22. The MOB spread widened to negative 250 from negative 243 Friday.

New issues

In light new-issue activity in the negotiated sector. Smith Barney, Harris Upham & Co. tentatively priced $178 million of Mississippi Higher Education Assistance Corp. student loan revenue bonds.

The issue included $56 million of Series B bonds priced at par to yield from 5.70% in 1999 to 6% in 2002. About $122 million Series C bonds, subject to the federal alternative minimum tax, were priced at par to yield from 5% in 1995 to 6.60% in 2006.

The issue is rated A by Standard & Poor's.

Competitive action was light yesterday. dominated by $35 million Albuquerque, N.M., unlimited tax bonds, which were won by a Kemper Securities group with a true interest cost of 4.9267%.

The firm reported an unsold balance of about $15.9 million.

Serial bonds were priced to yield from 2.75% in 1993 to 5.30% in 2002.

The issue is rated double-a by Moody's and Standard & Poor's.

In follow-through business, Dillon, Read & Co. freed $350 million of New York State Thruway Authority general revenue bonds from syndicate restrictions. In late secondary trading, the 5 3/4s of 2019 were quoted at 95 1/4-3/4 to yield 6.11% on the bid-side. The bonds were originally priced to yield 6.08%.

In other secondary action, traders reported some sizable blocks out for the bid. including $10 million New Jersey Turnpike 6s of 2016, which were said to have traded around 106 1/2.

In secondary dollar bond trading, prices were quoted down 1/4 to more than one point in spots, traders said.

In late action, San Antonio Electric and Gas System 5 3/4s were quoted at 95-96, to yield 6.20%; Massachusetts Municipal Wholesale 6 1/8s of 2019 were quoted at 96-7/8, to yield 6.43%; and Puerto Rico GO 6s of 2022 were quoted at 99 7/8-98, to yield 6.15%.

Seattle Metropolitan sewer revenue 6.20s of 2032 were quoted at 97 1/2-3/4, to yield 6.37%; Los Angeles Department of Water and Power 6s of 2032 were quoted at 96-3/8, to yield 6.27%; and New York City Water Authority 6s of 2017 were quoted at 94 3/4-95 3/4, to yield 6.42%.

In the short-term note sector, yields were unchanged to as much as 10 basis points higher in thin trading.

In late action, Iowa Trans were quoted at 3% bid, 2.95% offered: Los Angeles Trans were quoted at 2.90% bid, 2.85% offered; and Wisconsin notes were quoted at 2.90% bid, 2.85% offered. New York City Tans were quoted at 2.85% bid, 2.80% offered and New York State Trans were quoted at 2.92% bid, 2.88% offered.

Small New issues

Painewebber Inc. priced $35 million Airport Authority of Washoe County Reno, Nev., airport revenue refunding.

Serial bonds were priced to yield from 2.90% in 1993 to 5.90% in 2006.

The bonds are insured by the Municipal Bond Investors Assurance Corp. and triple.-A rated by Moody's and Standard & Poor's.

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