Municipal prices fell 3/8 to 1/2 point on average yesterday as prices continued to adjust for the second day in a row.

Wednesday afternoon the market suddenly turned lower as traders feared that prices were overextended after nearly two weeks of gains. The weaker tone spilled into yesterday's session, and municipals opened 1/8 to 1/4 point weaker.

Exacerbating the negative sentiment, initial state unemployment insurance claims fell 20,000 to a seasonally adjusted 406,000 in the week ended May 9.

Treasury prices moved significantly lower, led by the short end, after The Wall Street journal reported the Federal Reserve Board will wait to ease short-term interest rates.

But nervousness had abated in the tax-exempt sector soon after the Treasury 30-year bond moved behind 7.80%, returning to the territory the market had been stuck in for some time previous to the recent rally.

Municipal trading fell off dramatically by noon, but not before prices slipped as much as 1/4 point further before setting in ahead of the long Memorial Day holiday weekend.

Several market players said they were not sure that prices could remain in that range, and there was more downside potential.

"We still haven't found the bottom yet," said one trader. "The Street and institutions sold a lot of bonds and the market still feels fickle."

In the debt futures market, the June municipal contract settled down 10/32 to 95.14. The June MOB spread narrowed to negative 163 from negative 172 as municipals held in better than the Treasury contract.

Despite the price drops, the technicals remain in the market's favor, for the time being, as The Bond Buyer's 30-day visible supply fell to $2.87 billion, while Standard & Poor's Corp.'s Blue List of dealer inventory fell to $1.1 billion.

In light new-issue activity in the negotiated sector yesterday, PaineWebber Inc. priced and repriced $109 million of Iowa Student Loan Liquidity Corp. student loan revenue bonds. Yields were raised by one to five basis points for some bonds.

The final reoffering scale included $52 million Series A bonds priced to yield from 6% in 1988 to 6.45% in 2002. There were $30 million Series B bonds, subject to the federal alternative minimum tax, priced to yield from 6.414% in 2000 to 6.81% in 2004. About $26 million Series C bonds, subject to the AMT, were priced to yield from 6.30% in 1999 to 6.916% in 2006. Finally, $4 million of subordinated Series I bonds were priced at par to yield 6.95% in 2006.

The issue is rated Aa1 by Moody's Investors Service.

In competitive action, $93 million Florida full faith and credit Jacksonville Transportation Authority senior lien bonds were won by a First Boston Corp. group with a true interest cost of 6.399%.

The firm reported an unsold balance of $77 million late in the session.

The offering included serial bonds priced to yield from 3% in 1993 to 6.35% in 2010. A 2012 term was priced as 6 3/8s to yield 6.39%, a 2016 term bond was priced as 6 1/4s to yield 6.34%, and a 2022 term was priced as 6.40s to yield 6.45%.

In follow-through business, Goldman, Sachs & Co., senior manager for $1 billion New York City GO bonds, made Street allotments yesterday. Bonds generally traded at the net less 1/8. The 7s of 2022 were quoted at 7026%, where they were originally offered to investors.

Secondly trading was brisk during the morning session, and traders reported some sizable blocks out for the bid, including $13 million of Florida State Board of Education 6s of 2025, which were said to have traded right around 6.45%.

Traders also reported some moderate sized bid-wanted lists circulating in the Street. California paper suffered 1/2 to 3/4 point losses in light trading, market sources said. California 6 1/4s of 2012 were quoted late in the session at 97-3/8-97-1/2 to yield approximately 6.48%, compared with a closing quote of 6.42% Wednesday.

In other secondary dollar bond trading, Greater Orlando Aviation Authority AMT insured 6 3/8s of 2021 were quoted at 97-1/2-5/8 to yield 6.56%, San Antonio Water Authority 6 1/2s of 2010 were quoted at 99-1/2-7/8 to yield 6.54%, and New Jersey turnpike Authority 6 1/2s of 2016 were quoted at 99-7/8-100-1/8 to yield 6.51%. New York State Power Authority 6 1/4s of 2016 were quoted at 97-3/8-7/8 to yield 6.44% and south Carolina PSA 6 5/8s of 2031 were quoted at 98-3/4-99-1/4 to yield 6.71%.

Traders of short-term notes reported an uneventful day, with most notes remaining unchanged. Pennsylvania paper managed some gains in thin trading.

Late in the session California Rans 3 1/4s were quoted at 3.65% bid, 3.60% offered; Los Angeles Trans 5s were quoted at 3.65% bid, 3.49% offered; Pennysylvania Tans were quoted at 3.70& bid, 3.65% offered; and New York State Trans were quoted at 3.45% bid, 3.44% offered.

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