Municipals surrendered 1/8 to 1/4 points yesterday, sympathizing with Treasuries' sharper retreat on news of broad-based strength in manufacturing.

"It's down, but it's hard to figure out what it's down because we haven't seen a lot of trading today," one municipal trader said, "Maybe it's down

In the government market, the benchmark 30-year bond gave up nearly 1/2 point to yield 7.85%. The market dropped yesterday on news that the National Association of Purchasing Management's Index had risen to 58.2 in September from 56.2 in August. Returning to municipals, one analyst gauged yields on high-grade issues higher by two basis points, and said dollar bond prices ended 1/8 to 1/4 lower. Activity was light, the analyst said.

In debt futures, the December municipal contract closed down 10/32 at 87 1/4. Yesterday's December MOB was negative 364, unchanged from Friday.

The municipal trader said that with Friday's September employment report looming he doesn't expect activity during the rest of the week to show much improvement over yesterday's lackluster session.

"I don't think you are going to have a huge market move either way," he said, "You'll just have contracts moving, based on how bad they exaggerate the number of the day."

For municipals to break out their malaise, "it's going to take leadership," the trader said,"It's going to take desks that are willing to buy and sell bonds. They're aren't enough of those."

The market also needs some sign of direction from the Federal Reserve, the trader said.

"It's going to take another tightening by the Fed or a statement to the effect of 'Hey, we think we've gone far enough,' "the trader said. While he believes the economy is slowing, the trader thinks the Fed should tighten again.

"Because that's what all the soothsayers want," he said. "Give them what they want."

As for yesterday's NAPM report, Marilyn Schaja, a money market economist at Donaldson, Lufkin & Jenrette Securities Corp., said the "broad-based" strength it showed offered no comfort for bondholders.

"It was a bad report as far as the market was concerned," Schaja said. "The increase in the overall index was broad-based, so you had increases in new orders, production, employment, everything."

Schaja noted that the report's prices component rose to the highest level since August 1988. The increase may have caught some by surprise, given the prices paid component of Friday's Chicago Purchasing Managers' report, she said. The earlier report's prices paid component decreased to 72.1% in September from 79.3% in August.

Yesterday's report may have spooked the market because participants may have inferred that Friday's employment numbers could be stronger than expected, and also that price increases are building at the producer level, Schaja said.

"There were no redeeming features to [the NAPM] report," she said.

As for Friday's jobs report, Schaja sees an 230,000 increase in non-farm jobs, and she says that the consensus is closer to 250,000.

"The range seems to be very tight," she said, One range she saw estimated September nonfarm jobs growth at 211,000 to 300,000, "So that's a less than 100,000 range," she said.

Robert Giordano, director of economic research at Goldman, Sachs & Co., cited both the NAPM survey and the lack of a Fed tightening at the Sept. 27 Federal Open Market Committee meeting as contributing to yesterday's losses.

Giordano said the purchasing managers report showed "continued reasonably strong growth in the economy, and some worsening of price pressures." He also pointed to "increasing worries that the Federal Reserve, by not raising interest rates last week, is a step behind, as opposed to a step ahead, of these inflation pressures."

Giordano expects nonfarm jobs to show a roughly 300,000 gain. However, "I think the Federal Reserve was given enough of an incentive by the Purchasing Managers survey to raise interest rates regardless of what the employment report shows," he said,

"I think they will raise interest rates in the not too distant future. Unfortunately, it will appear reactive as opposed to preemptive. That's unfortunate because it could have been the other way," Giordano said.

The Fed was "gambling too much on what the purchasing managers' and the employment figures would show," he said.

Charles Lieberman, chief economist for financial markets at Chemical Bank, noted that the NAPM report's employment component rose by three points in September, to 52.5 from 49.4 in August.

"So that's a good solid increase, and it suggests that employment in the manufacturing sector [as] reported on Friday ought to be pretty strong," Lieberman said. He expects a 290,000 increase in non-farm jobs.

The economist also pointed to the NAPM report's price component, which rose to 77.1 in September after posting an "extremely high" reading of 74.5 in August.

"So that's the kind of thing that reinforces market fears that inflation is really kicking in," Lieberman said.

Another piece of the NAPM report, which Federal Reserve chairman Alan Greenspan is known to watch, is supplier delivery, Lieberman said. The component, which measures how quickly firms respond to incoming orders, rose to 61.6 in September from 61.1 in August.

"What that means is firms are responding more slowly to incoming orders," Lieberman said. That means that companies have less inventory on their shelves, and that demand is increasing at such a rate that the companies are finding themselves more and more back ordered.

As for prospects of a Fed tightening, Lieberman said all of the recent data points to a growing economy.

"So I think their discussion will shift from not whether they should tighten, but rather when," he said. Lieberman thinks that Nov. 15, the date of the FOMC meeting, will be the latest that the Fed will tighten, but the central bank could pull the trigger as early as this month.

In light new-issue action yesterday, senior manager First Chicago Capital Markets tentatively priced $150 Illinois million general obligation college savings bonds, series October 1994. The offering tentatively featured a top yield of 6.35% in 2016.

The 30-day visible supply of municipal bonds yesterday totaled $2.90 billion, up $203.9 million from Friday. That comprised $1.63 billion of competitive bonds, up $204.8 million from Friday, and $1.275 billion of negotiated bonds, down $800,000.

Standard & Poor's Blue List of municipal bonds declined $42.2 million yesterday to $1.98 billion.

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