Treasury prices fell Friday, dragging municipals along and discouraging the Street, which faces $6 billion of new supply this week, including $1.09 billion New York City bonds.

The market, already on tenterhooks, turned decidedly bearish Friday after a news story in the Los Angeles Times suggested that a Clinton administration would offer up an even more aggressive fiscal stimulus package than had been proposed.

Credit market players early last week set up aggressive positions anticipating an ease in monetary policy. But malaise set in on trading desks as the week wore on and the Fed failed to ease.

In addition, municipals also have suffered from a heavy tone as record issuance continued to pound the primary sector.

Specifically, traders worried that this week a significant amount of the $ 1.3 billion of California general obligation bonds sold last week would be dumped into the Street from dealer inventories at the same time $6 billion new bonds hit the market.

Merrill Lynch & Co., senior manager for the California sale, reported an unsold balance of $147 million late Friday.

"People were bullish and set up for a rally on a Fed ease and then were disappointed," a trader said late Friday.

"Now all of a sudden there is the perception that the California deal is in trouble and the bid side in the secondary is very weak," the trader said. "We're oversold, but it feels like we're due for an ugly shot. We're at the mercy of the Treasury market and perception, not fact, is dictating things."

Several market sources said the California deal is faring better than general market perception, but the final outcome was unclear. Uncertainty mean selling, one trader noted, and most market players said they expected underwriters to price new deals to sell this week.

The Bond Buyer calculated this week's supply at $6.02 billion, including short-term note deals.

Total estimated sales for this week are the lowest since the week of Sept. 7, when $4.7 billion of new deals were sold.

The negotiated sector will be dominated by the sale of $1.09 billion of various New York City bonds, to be price by Lehman Brothers.

Adding to the deluge will be $235 million of Connecticut Housing Finance Authority housing mortgage revenue bonds, to be priced by First Boston Corp.; and $154 million of Louisiana Public Facilities Authority student loan revenue bonds, to be priced by Smith Barney, Harris Upham & Co.

The competitive sector features $103 million of Nassau County, N.Y., various-purpose bonds and $173 million of Wisconsin improvement bonds.

The economic calendar, meanwhile, is light this week, highlighted by the release of September housing starts on Tuesday and initial jobless claims on Thursday.

Friday's Market

The market opened with a nervous tone and sellers emerged. Prices declined as much as 1/2 point in sympathy with Treasuries. But the government market bounced off its lows and municipals recovered some losses.

Traders quoted the cash market down 1/8 to 1/4 point on the day.

In the debt futures market, the December municipal contract settled down 3/32 to 95.15. MOB spread narrowed to negative 263 from negative 272 Thursday.

In secondary dollar bond trading, prices were quoted down 1/8 to 1/4 point on average.

New York City Water and Sewer 6 3/8s of 2022 were quoted at 95 3/4-96 1/8, to yield 6.706%; Los Angeles Department of Water and Power 6s of 2032 were quoted at 94-1/2, to yield 6.41%; and Washington Public Power Supply System 6 1/2s of 2015 were quoted at 98 3/8-5/8, to yield 6.639%.

Puerto Rico GO 6s of 2014 were quoted at 94 3/8-5/8, to yield 6.486%; Illinois Toll and Highway 6 3/8s of 2015 were quoted at 97 1/2-98, to field 6.588%; and Denver Airport AMT 6 3/4s of 2022 were quoted at 94 1/4-95, to yield 7.222%. Florida Board of Education 6s of 2025 were quoted at 94 1/2-3/4, to yield 6.403%.

In the short-term note sector. yields were about three basis points higher on average, traders said.

In late action notes of Los Angeles, New Jersey, Pennsylvania, and Wisconsin were all quoted at 2.78% bid, 2.73% offered.

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