Municipals added 1/2 point yesterday after a sharp drop in July durable goods orders and a solid Treasury auction had governments flirting with a full-point gain.

Yields on high-grade issues improved by five basis points, while dollar bond prices gained 1/2 point overall, a municipal analyst said.

"Dollars were pretty flat through the morning but by 2:30 [p.m.] they were up 1/4, and they added another 1/4 later in the afternoon," the analyst said. "They weren't believers in the morning." The market was probably waiting to see how Treasuries reacted to yesterday's five-year note auction, the analyst said. The 30-year Treasury bond closed up nearly a point to yield 7.45%. Yesterday's September MOB spread was negative 389 compared with negative 381 on Tuesday.

In debt futures, the September municipal contract closed 21/32 higher at 91 5/32.

New orders for durable goods orders fell 4.2% in July, marking the first decline in five months, and the biggest since December 1991, when orders were down 5.4%. The unexpectedly sharp drop was due in part to summer shutdowns at the automakers, the Commerce Department said.

"Over half of the decrease was due to the motor vehicle and parts industry, which was heavily affected by the growing practice of shutting down for two weeks in July," Commerce said.

In negotiated action yesterday, a Merrill Lynch syndicate official said early courting of in-state retail customers paid off for the Contra Costa Water District, Calif. The district's $275 million water revenue bonds, which were MBIA-insured, saw strong demand from both retail and institutional investors, said Paul Kuhns, a managing director and co-head of Merrill Lynch & Co.'s municipal underwriting desk.

The offering consisted of serial bonds priced to yield from 4.50% in 1997 to 6% in 2009. It contained term maturities in 2011, 2014, 2019, 2024, and 2026. The 2026 maturity offered a top yield of 6.28%.

Kuhns said Merrill was able to reprice the offering at lower yields despite what many thought were aggressive preliminary levels.

"We were basically being told by a lot of people that we were anywhere from five to seven basis points too rich," Kuhns said.

At the repricing, yields on serials from 2000 to 2004 and 2006 to 2008 were lowered by five basis points. The 2005 maturity was lowered by 2.5 basis points. The yield on the 2014 term was lowered five basis points, while returns on the 2019 and 2026 terms were dropped by two basis points each.

Merrill's plan to aggressively shop the deal to retail customers helped it gain the Contra Costa underwriting job, Kuhns said. The effort to reach retail began last Friday, and roughly one-tenth of the deal was committed pre-sale, he said. The strong retail response apparently heartened institutional customers, who also posted strong demand for the deal, Kuhns said. A Standard & Poor's upgrade to AA-minus from A-plus also helped the sale, he said.

While noting yesterday's municipal market gains, Kuhns said most of that improvement occurred after the sale. The offering benefited mainly from Contra Costa's good name and from the marketing efforts, he said.

In the short-term market, a Lehman Brothers group won $1.698 billion of Texas tax and revenue anticipation notes, bidding a net interest cost of 4.0012%., according to assistant deputy state treasurer John Bell. The remaining $2 million of the $1.7 billion note offering was won at the same NIC by a woman-owned firm called Friedman, Luzzatto & Co., Bell said.

While negotiated deals are traditionally seen as the best way to promote the inclusion of minority- and woman-owned firms, Texas devised a set-aside program aimed at enhancing such firms chances to participate in its competitive offering, Bell said.

Under the program, the state set aside $200 million of the one-year notes for minority- and woman-owned firms, and also allowed the firms to name a minimum interest rate. If the average net interest cost came in below that minimum, the firms would be automatically out.

While a total of five firms submitted bids totaling $169 million, all but Friedman Luzzatto bowed out following Lehman's "aggressive" 4% bid, Bell said. Friedman Luzzatto did not specify a minimum, he said. Though most of it eventually faded, Bell said the $169 million interest level was gratifying. Allowing the firms to set a minimum interest rate was also good because it allowed them to participate without being locked in should the bidding prove too aggressive, Bell said.

He said while Texas would have like to have seen more minority and women-owned firms on the deal, the state was also quite pleased with the low borrowing cost it achieved on the sale. Bell added that it appeared that a number of the firms eventually joined the major bidders.

"I guess we're happy with the whole thing," he said.

Elsewhere, the 30-day visible supply of municipal bonds yesterday totaled $2.72 billion, down $271.4 million from Tuesday. That comprises $1.406 billion of competitive bonds, down $289.4 million from Tuesday, and $1.313 billion of negotiated bonds, up $18.1 million from Tuesday.

Standard & Poor's Blue List of municipal bonds rose $3.2 million yesterday to $1.83 billion.

Dean Patterson contributed to this column.

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