Tax-exempt prices recovered with Treasury bonds by early Wednesday afternoon, following a downward plunge prompted by economic news, to end unchanged to off 1/8 point.

As traders left early for the holiday, the New York state debacle still held center stage.

The angst over the state's budget began nearly two weeks ago, when New York adjusted its economic assumptions and came out with a projected budget gap of $4.5 billion for fiscal 1992 and 1993, up from the $2.5 billion assumed earlier.

That grimmer economic outlook cast its shadow on two large Empire State offerings last week, as underwriters scrambled to stciker official statements with the bad news.

By late Wednesday, $225 million of state general obligation bonds sold by auction Nov. 13 and closed on Nov. 30, had yet to be freed from syndicate restrictions and enter secondary market trading. And a $415 million Metropolitan Transportation Authority deal priced by a Goldman, Sachs & Co. syndicate was trading lower.

Metropolitan Transit Authority bonds with quoted off 1/8 point, with the 6s of 2018 offered at 84 3/4 and bid at 84 to yield 7.03%.

Andrew Rowley, a managing director and manager of the syndication for Morgan Stanley, said New York's GO bonds have not yet been freed from syndicate restrictions because "we still have a balance of just under $50 million" in the account.

He noted the syndicate has been moving about $1 million of the bonds a day. To provide underwriters in the syndicate with a sales incentive, the concession on the bonds was increased to 3/4 from 3/8, he said.

As for suffering the same fate Goldman did with the MTA bonds, Mr. Rowley said, "We may lose a little money on the balance of the bonds, but overall we are in good shape." Members of the Goldman syndicate lost an average of $300,000 each on the transaction, by one account, and losses were estimated at as high as $2 million for some members of the account. Losses on the state deal could also run high.

One banker said that in when-issued trading, the bonds have given up five basis points.

The state deal was won by Morgan Stanley in a competitive auction with a true interest cost of 6.3478%. Bonds maturing in 2021 were reoffered at 6.80%. This week, the 20-Bond Index of general obligation bond yields was calculated at 6.78% on Wednesday, with the New York State yield, a component of the index, pegged at 6.97%.

That trend could continue next week, if the state's GO bonds free to trade. The bonds will join nearly $1 billion of New York names hitting the municipal market then.

Among the issues bodies is the state's Urban Development Corp., which announced it will offer $110 million by negotiation with Smith Barney, Harris Upham & Co.

In addition, the New York State Dormitory Authority has proposed a $220 million revenue bonds offering through Goldman Sachs, and another deal to raise $23 million through PaineWebber Inc. The state's power authority has slated a $295 million offering through First Boston.

The New York State Environmental Facilities Corp. will also join the fray, tapping the market for $350 million with water pollution control revenue bonds marketed by Goldman.

As though that weren't enough, the following week another New York issuing colossus, the Local Government Assistance Corp., plans a $475 million deal through a Lehman Brothers and Goldman Sachs syndicate.

For the state GOs, a banker confided, "It doesn't bode well."

Privately, bankers say the information on the state's budget gap is not to blame so much as the way in which it was handled. "The issue is really managing the disclosure process," said one banker, requesting he not be named.

"One thing that might come out of this is that the state might try to set up some sort of central repository for information," he added.

Such a repository, he said, would supplant the static numbers of official statements and "put more burden on the state to make disclosure to investors, but away from the actual documents."

Market Activity

Bond price erosion Wednesday followed word from Washington that jobless claims fell 80,000 to a seasonally adjusted 413,000 in the week ended Nov. 16, and that durable goods orders rose 3% in October and new unemployment claims fell sharply.

But prices rebounded subsequently on other data, including a personal income increase of only 0.2% in October -- the smallest increase since July -- and a personal spending downturn of 0.3% when the market had expected an increase for the month.

Municipal trading was light Wednesday as offices wound down business in anticipation of the Thanksgiving holiday and a hectic pace next week.

"There's a sensible degree of caution prior to next week," one market observer said. Wednesday's market, he added, was "not conducive to going out and picking up a lot of inventory."

Traders are looking ahead to a raft of economic data as well as a moderate slate of new deals.

Leading economic indicators, scheduled for release Tuesday, could set the tone for next week's market, along with new home sale data, Wednesday's GNP number, and the beige book. In addition, prospects of a Japanese interest rate cut or a German interest rate increase could cloud the market horizon, one source said.

In the negotiated arena, a Donaldson, Lufkin & Jenrette Securities Corp. syndicate repriced an offering by the North Carolina Housing Finance Agency, raising yields on the deal's 2017 and 2023 maturities by five basis points to 6.95%. The maturities are subject to the alternative minimum tax.

A banker at the firm said late Tuesday that the $90 million deal was being fine-tuned to spur institutional interest.

Dealer inventory rose only slightly Wednesday as Standard & Poor's Corp.'s The Blue List grew by $61.9 million to $1.738 billion.

The 30-day calendar of visible supply rose $441 million from Tuesday, reaching $2.92 billion. The total includes $817.8 million of negotiated offerings and $2.1 billion of competitive deals.

In trading at mid-session, dollar bonds were quoted mostly unchanged. North Carolina Eastern 6 1/2s of 2017 were quoted unchanged from this morning, at 96-96 1/2. New Jersey Turnpike Authority 7.20s of 2018 were quoted unchanged at 105 5/8-3/4.

In the debt futures market, the December contract for municipal bonds was quoted down 5/32 at 94.13.

In the short-term market, top-grade dominant issues were quoted firmer, with Los Angeles and Texas Trans yielding 4.02-4%. On Tuesday, Los Angeles notes had been quoted at 4.09%-4%. New York State Trans were quoted unchanged at 5.30-5.20%.

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