Municipals dropped 3/8 to 1/2 point yesterday as a sinking dollar weakened Treasuries and munis tagged along.

"At the moment, I think we're following governments," a municipal trader said yesterday. "If they're going down, we're going down."

With many buyers on vacation, "some trading is going on, but really it's very, very quiet," the trader said, adding: "Nobody has any inspiration."

In light secondary activity yesterday, yields on high-grade issues weakened by five basis points overall, while dollar bond prices dropped 3/8 point, according to a municipal analyst.

In debt futures, the September municipal bond contract dropped 3/8 to finish at 90 6/32. Yesterday's September MOB spread was negative 382, compared to negative 392 on Friday. The 30-year Treasury bond closed down 3/4 point to yield 7.54%.

"There were lists," the analyst said, estimating that bid lists totaled nearly $300 million. With little of any significance priced in the primary market yesterday, municipals had "nothing to hang our own hat on, so we were following Treasuries," the analyst said.

Brian J. Fabbri, chief economist for North America at Paribas Capital Markets, New York, attributed the dollar's decline largely to a continued lack of progress in trade talks between the United States and Japan, rather than to fresh political news.

As the dollar lost ground against the Japanese yen, the bid for greenbacks overall weakened, and the U.S. currency lost ground against the German mark as well. In late New York trading yesterday, the dollar was trading at 97.80 Japanese yen, down from 98.65 late Friday.

Such price movements are typical in late August when many trading desks are thinned by vacations, Fabbri said.

"The market tends to trade thinly on a lot of different trivia," he said.

Turning to the buy side, AMG Data Services data shows that municipal bond funds experienced net outflows for six of the nine weeks from the week ended June 22 to the week ended Aug. 17. Funds saw net outflows of $95 million for the week ended Aug. 17 and $595 million for the week ended Aug. 10, according to AMG Data president Robert Adler.

The almost $700 million of total net outflows for the two-week period does not include figures for the Franklin, Lord Abbett, and Merrill Lynch funds, which report monthly. Those three account for about 25%, of the municipal assets AMG Data tracks.

On the new-issue front, CS First Boston is expected to price $152 million of New York State Mortgage Agency revenue bonds today. Tomorrow, Merrill Lynch & Co. is expected to price $275 million of Contra Costa Water District, Calif., water revenue bonds. On the competitive side, Los Angeles is scheduled to sell $110 million of bonds today.

Next week's negotiated calendar is expected to include $225 million of Denver Airport revenue bonds through Lehman Brothers.

In other news yesterday, the 30-day visible supply of municipal bonds totaled $3.05 billion, down $380.8 million from Friday. That comprises $1.811 billion of competitive bonds, up $434 million from Friday, and $1.237 billion of negotiated bonds, down $815 million from Friday.

Standard & Poor's Blue List of municipal bonds rose $19.1 million yesterday to $1.72 billion.

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