Futures led cash prices in a slow erosion yesterday as the market drifted lower in lackluster trading.

Both Treasury and municipal bonds opened lower for the fourth straight session as prices continued to back off their recent highs. With few active ingredients in the markets, action has tended to be on the torpid side.

Higher oil prices combined with hedge-related selling from Portugal's $1 billion 10-year note offering and a mounting schedule of corporate supply to knock the Treasury long bond down at midafternoon, traders said. Municipals suffered more losses in sympathy. especially in futures trading.

By session's end. tax-exempts were quoted down 1/4 to 1/2 point on the day. High-grade bond yields were quoted three basis points in the intermediate range.

"The needle is pointing down and there has been a distinct lack of action and interest here." said one trader. "We're still gapping down off the highs, looking for something to give us direction."

In actively traded dollar bonds, Guam 5.40s of 2018 were quoted at 99-1/2 to yield 5.47% late in the day; Washington Public Power Supply System 5 3/8s of 2015 were quoted at 5.61 % bid, 5.60% offered; and Jaksonville Electric 5 1/4s of 2021 were quoted at 5.40% bid, 5.37% offered.

New York State Power 5 1/4s of 2018 were quoted at 99-1/2 to yield 5.32%; Florida State Board of Education 5 1/4s of 2023 were quoted at 97 3/4-98 to yield 5.40%; and Florida MPA AMBAC 4 1/2s of 2027 were quoted at 88-1/2, to yield 5.26%.

In the debt futures market, the December municipal contract settled just off the low of 103.30. down 19/32 t0 103.31, down from a high of 104.19. The MOB spread narrowed to negative 463 from negative 464 Friday.

Market players have been waiting for the results of new issues to gauge the next market move, but yesterday's deals offered little help.

Topping the competitive calendar, Merrill Lynch & Co. won $115 million of Aurora, Colo., unlimited tax general obligation water refunding bonds with a net interest cost of 4.737%.

The firm reported an unsold balance of approximately $38 million.

A Merrill underwriter said the balance was all in shorter maturities within 10 years. The dealer added that longer bonds were all sold to institutions, despite the weaker tone in the market.

Serial bonds were reoffered to investors at yields ranging from 2.75% in 1994 to 4.90% in 2008. Bonds in 2004, 2007, and from 2009 through 2014 were not formally reoffered to investors.

The issue is rated A1 by Moody's Investors Service and AA-minus by Standard & Poor's Corp.

Dominating negotiated activity, PaineWebber Inc. priced $140 million noncallable Kentucky Higher Education Student Loan Corp. revenue bonds, subject to the federal alternative minimum tax.

The offering included $35 million Series A bonds priced at par to yield from 3.60% in 1995 to 4.70% in 2000. There were $90 million Series B bonds priced at par to yield from 4.90% in 2001 to 5.30% in 2005 and $16 million Series C bonds priced at par to yield from 3.75% in 1995 to 5.05% in 2002.

The issue is rated A1 by Moody's and AA-minus by Standard & Poor's.

Elsewhere, Morgan Stanley & Co. priced and then restructured $104 million revenue bonds for the Southern Minnesota Municipal Power Agency.

The firm said it received the verbal award by midafternoon at the original price levels. But a 2011 maturity was added to the serial bond scale.

The final offering included serial bonds priced to yield from 2.70% in 1994 to 5.18% in 2011. A 2013 term was priced with a 5% coupon to yield 5.228%.

The bonds are rated Al by Moody's, and A-plus by Standard Poor's and Duff & Phelps.

Market players will have more to sink their teeth into today and into the near term as forward supply increases.

The 30-day visible supply jumped $1.4 billion to $6.7 billion yesterday from $5.3 billion Friday. This is the first time it has crossed the $6 billion mark since Aug. 24 and is now at its highest level since Aug. 4, when it was $6.87 billion.

But secondary supply has increased at the same time as dealers stock more bonds during sessions marked by falling prices.

The Blue List of dealer inventory up for sale rose for the seventh straight business day to $1.5 billion, from $1.39 billion Friday. Since Sept. 9, The Blue List has risen 72% from $874 million, and is at its highest level since Sept. 1, when it was $1.55 billion.

Looking to the economic front, housing starts will be released today, followed by durable goods orders Friday and minutes from the most recent Federal Open Market Committee meeting.

Participants said that the few economic reports will most likely take a back seat to the Treasury's two-year and five-year note offerings, noting that August housing starts and durable goods figures are unlikely to alter noticeably the market's views of the economy.

The data are forecast to be consistent with the sawtoothed but still sideways pattern seen since the beginning of the year.

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