An increase in jobless claims combined with light supply and strong investor demand to boost tax-exempts 1/2 to 1 point yesterday in heavy dealer-to-dealer trading.

After several sessions of uncertainty, the credit markets began to rise Monday and Tuesday as retail investors stepped into the market. Institutions jumped in Wednesday and the credit markets opened stronger for the four session in a row yesterday as the Street joined the crowd.

Sparking the rally yesterday, the Labor Department reported initial state unemployment insurance claims climbed 19,000 to a seasonally adjusted 422,000 in the week ended July 11.

Treasury and municipal prices rose about 1/8 to 1/4 point after the stronger than expected report was released. As the day progressed, both markets gradually climbed higher as traders gave up short positions and moved out along the yield curve.

That move gave tax-exempt traders more confidence, and prices began to rise rapidly later in the afternoon. Municipals benefited especially from strong demand for a light supply of available securities from investors with cash to spend from massive July 1 bond redemptions.

"The technicals in munis are great," a trader acknowledged. "This is the last part of a rally where people who were hesitant to get in earlier throw in the towel and buy everything."

By session's end, prices were quoted up 1/2 to as much as one point, while some dollar discount bonds were said to gain 1 1/2 points on the day in a "run to the coupon."

For example, Salt River 5 3/4s of 2019 were quoted at 95-1/4 to yield 6.13% on Wednesday but late yesterday the same bond was quoted trading at 96 1/2-3/4 to yield 6.0% on the bid-side.

Zero coupon bond yields fell about 10 basis points, traders said, while high-grade yields fell five to seven basis points on average.

In another example of insatiable buyer appetite for bonds, one market source said that a block of bonds, put out for the bid on Tuesday, as 6s at 6.22%, were said to have traded at 5.92% yesterday, reflecting a 30 basis point drop in yield over three trading sessions.

Meanwhile, in the debt futures market, the September municipal contract settled 16/32 higher to 99.06.

But the September MOB spread widened to negative 152 from negative 138 Wednesday as Treasury prices outpaced municipals.

Municipal prices are likely to tag along behind the Treasury market over the next several sessions, traders said.

Unless the Treasury market stalls going into the annual refunding in August, traders argued that there is little reason prices would suffer, barring any unforeseen disasters.

"The market is gapping in certain areas," one trader said early yesterday. "We're at critical levels and we should be getting into real resistance. We're going to have to see whether we're going to be able to break through, that's the real test."

But other traders argued that since tax-free supply is light and demand is strong, the municipal market should weather a refunding related price drop in the government market.

The Bond Buyer yesterday calculated 30-day visible supply at $3.35 billion, while The Blue List, an approximate measure of dealer holding, rose $7.3 million to $1.03 billion.

New-Issue Pricings

New deals were scarce yesterday, but the strong market allowed underwriters to lower yields on new bonds.

Leading activity, Merrill Lynch & Co. priced and repriced $150 million of Osceola County, Fla., transportation improvement bonds for the Osceola parkway project.

Serial yields were lowered by 10 basis points on the short end and five on the long end, while term bond yields were lowered by five basis points. Zero coupon bond yields were lowered by 10 basis points.

The final reoffering scale included serial bonds priced at par to yield from 5.15% in 2000 to 5.95% in 2008 and 6.10% for term bonds in 2017. There also were capital appreciation bonds priced to yield from 6.40% in 2009 to 6.45% in 2014.

The issue is insured by the Municipal Bond Investors Assurance Corp. and triple-A rated by both Moody's and Standard & Poor's.

In followthrough business in the short-term note sector, Goldman, Sachs & Co., senior manager for $375 million of Iowa tax and revenue anticipation notes, freed the issue from syndicate restrictions. The notes were quoted trading late in the session at 3.01% bid, 2.95% offered, where they were originally priced to yield 3.05%.

Secondary Trading

There were some customer bid-wanted lists reported yesterday, but trading was concentrated mostly in the Street, traders said. Some sizable blocks changed hands, including $24 million Washington, D.C., general obligation MBIA-insured 6.30s of 2012, which were said to have changed hands at 6.10%, less 3/8, near the net.

In other secondary dollar bond trading, Colorado Springs 6 1/8s of 2020 were quoted at 99 5/8-7/8 to yield approximately 6.15% on the bid-side, while Texas Municipal Power Agency MBIA 5 3/4s of 2012 were quoted at 97-1/2 to yield 6.01%.

In short-term note trading, yields were unchanged to as much as 10 basis points lower on the day, traders said.

In late secondary action, Los Angeles Trans were quoted at 2.87% bid, 2.85% offered, New York City Tans were quoted at 2.82% bid, 2.75% offered, while Wisconsin notes were quoted at 2.89% bid, 2.85% offered, New York State Trans were quoted at 2.86% bid, 2.80% offered.

In prerefunded bond trading yields were 10 basis points lower on the day.

Bonds with national names, callable in 1995, were quoted in New York at 3.85% bid, 3.80% offered, while bonds, callable in 1996, were quoted at 4.20% bid, 4.15% offered.

SCPPA Ratings Under Review

Both Moody's Investors Service and Standard & Poor's Corp. are still reviewing documents on Southern California Public Power Authority bond issue sold July 10, after putting the ratings on notice the day before the sale, rating agency officials said yesterday.

Standard & Poor's originally rated the $482 million of refunding bonds AA-minus while Moody's rated the issue Aa. But just prior to the sale the deal was restructured as a crossover refunding, secured by SCPPA revenues and a guaranteed investment contract. As a result, Standard & Poor's withdrew its rating, while Moody's decided to review its rating.

Despite the moves, the bonds were sold in the marketplace by a syndicate led by Smith Barney, Harris Upham & Co.

The two rating agencies said at the time of the sale that the ratings would be reissued as late as last Friday. But yesterday officials at both agencies said the review process was still underway.

"We're still reviewing the guaranteed investment contract," said Karen Krop, senior analyst with Moody's. "I don't think we're identified problems with the GIC. It's just complicated and it takes time."

Ms. Krop would not speculate on when ratings would be issued.

Late yesterday, the outstanding bonds were said to have traded around 6.05% for bonds due in 2021, where they were originally priced to yield 6.15%.

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