The high yields on New York City's upcoming $600 million general obligation offering will lure investors to the trough despite misgivings about the city's fiscal shackling to deadlocked state budget negotiations, municipal market participants say.

The city expects to sell $485 million of tax-exempt bonds and $115 million of taxable bonds tomorrow or early next week, according to bond syndicate members.

Market participants said yields could go as high 8.60% on the long end, 10 basis points higher than those offered on a city deal priced in early December.

The city last sold bonds in February, when Lehman Brothers priced about $1 billion of taxable and tax-exempt bonds. The tax-exempt bonds were priced with a maximum yield of 8.35%.

Although the city's bonds are still investment grade, the yields are about 150 basis points over similarly rated tax-exempt securities and are looking more like the yields on municipal junk bonds.

New York City is currently rated A-minus, with a negative outlook, by Standard & Poor's Corp., and was downgraded to Baal from A by Moody's Investors Service in February. On Friday, Moody's confirmed its rating on about $16 billion of outstanding city bonds and the upcoming issue. Standard & Poor's still has the rating under review.

Massachusetts, rated BBB by Standard & Poor's and Baa by Moody's, enjoyed a healthy maximum yield of 7.83% on its latest GO offering in May.

California, with triple-A ratings from both agencies, received a maximum yield of 6.65% on its last GO sale, in February.

Goldman, Sachs & Co., an institutionally oriented firm and one of the city's five senior managers, will run the books on the offering. City officials could not be reached for comment on Friday.

A senior banker with Goldman Sachs said the firm was "poised to price" the bonds, but may delay the sale to wait and see what happens in Albany, how the market looks, and what is the outcome of the Standard & Poor's rating action. "We will wait till Monday to make a decision," he said.

The tax-exempt serial bonds will mature in 1992 through 2020. The taxable bonds will mature in 1996-1998, 2001-2002, and 2009 through 2011.

The city set aside $ 20 million of the tax-exempt bonds due in 2012 and structured them as CitySavers, or zero coupon bonds. They will be offered in the secondary market by underwriters, with principal maturities due 1996 through 2011 and interest payments structured for 1992 through 2012.

A spokesman for the city comptroller's office said that as of Friday there were no plans to use bond proceeds to capitalize interest payments on outstanding city bonds. Members of Mayor David N. Dinkins's administration had proposed using about $50 million of bonds for debt service payments to help close a fiscal 1991 budget gap. City Comptroller Elizabeth Holtzman does not support the measure.

There has been modest bid-wanted activity on long-term, tax-exempt, uninsured city bonds, which have been trading around 8.50%. One trader noted that slightly stronger bids were received for some city paper, both from funds and retail.

Despite the city's gnawing budget problems, municipal market participants said they feel the deal is "doable."

"The New York city issue will get gobbled up," said one trader. "The bond funds will love the yield. It's a small issue compared to what they've been coming with."

"People are pleased with the way the last few issues have traded," another trader said. "It will get snapped up."

However, one seasoned New York bond trader offered words of caution: "You've got to ask yourself what happens if there's no state budget agreement over the weekend.

"Everybody is counting on it, and people are very complacent about the whole thing," he said. "If no budget is signed, tell me what fiduciary is going to buy it. This could be a bigger story than people think."

But an end is in sight for the state's budget impasse. On Friday afternoon, the Assembly passed four budget bills for the fiscal 1992 budget, now 60 days overdue.

Voting 93 to 54 and along partisan lines on each bill, the Assembly passed the debt service bill, the capital projects bill, the legislative and judiciary bill, and the state operations bill.

But the two most important bills, the tax bill and the aid to local governments bill, have not been passed yet. The Assembly adjourned until 2 p.m. Sunday, pending the drafting and the printing of the other bills.

"If they are not ready Sunday, we will pass them as soon as we can," said a spokesman for the Assembly. The state Senate was expected to vote on the same four bills Friday afternoon, a spokesman for the senate said. The Senate then may take up the other two bills by Sunday or Monday, he added.

Despite the state budget delay, a municipal bond salesman said of the deal, "For one thing, it is only $600 million.

"It is not a tremendous amount of bonds," he said. "We expect see an 8.00% in three years. In 10 years, 8.50% and then a flat yield curve.

"I think people are going to find the yields attractive, even with the city under duress," he noted. "I expect the retail shops to really push the bonds and I think this deal is geared toward retail."

A number of municipal market participants said that as troubling as the city's present crisis is, "it is not like 1975."

One senior trader with a retail bond firm said, "We know what the problems are and city officials are doing something about them."

As for the high yields and interest costs to the city, he said, "As long as the city is a big borrower, they will always pay a penalty."

Although the city lopped $3.2 billion from its $67 billion 10-year capital program from fiscal 1992 through 2001, it still plans to sell about $750 million in GO bonds a quarter.

The trader said the firm's retail clients are "very interested" in city bonds, although they are concerned that the small size of the offering may not yield enough bonds to satisfy their orders in the primary market because of high demand for the bonds, especially from large institutional buyers.

The trader compared the return on a five-year treasury note and the expected yield on a city bond due in 1996. The treasury note was yielding about 7.68% on Friday and, "if an investor is in the 28% federal income tax bracket, after taxes you have 5.52%," he said.

"The 8.10% city you are getting on a city bond due in 1996 is a real 8.10%. The treasury would have yielded you 11.75%," he added.

Nevertheless, fiscal monitors and bond raters are wary about the city's fical health.

Richard P. Larkin, managing director with Standard & Poor's Corp., said, "We are still reviewing the rating. We would like to see a little more of what is coming out of Albany."

He added, "Resolution of the state budget would make the [city's] cash-flow problems go away."

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