A late Treasury rally spurred municipals higher yesterday with the futures market leading the way.

The market edged up at the open, thanks to some short covering. The market shrugged at the Commerce Department's report that the U.S. economy grew at an annual rate of 2.9% in the third quarter, little changed from the 2.8% gain last reported.

Traders later were impressed enough by the government note market's performance that they took futures prices nearly 1/2 point higher by mid-morning. Tax-exempt players quoted bonds up 1/8 point but were left with little to accomplish around midday as holiday sluggishness took its toll. Quiet trading screens were jolted when the Treasury market skyrocketed more than one point thanks to the 5 1/8% coupon the Treasury set on $11 billion five-year notes auctioned at a 5.19% yield. The positive auction results also sent the tax-exempt contract up over one point.

But traders said the holiday still kept activity light to moderate. Prices were quoted up 1/4 to 1/2 point, by session's end.

In secondary dollar bond trading, Dade County, Fla., 5s of 2013 were quoted at 5.30% bid, 5.27% offered; Florida MPA AMBAC 5.10s of 2025 were quoted at 5.38% bid, 5.37% offered; and San Jose 5s of 2020 were quoted at 5.38% bid, 5.35% offered. Orange and Orlando FGIC 5 1/8s of 2020 were quoted at 5.40% bid, 5.35% offered; and Chicago O'Hare MBIA 5s of 2018 were quoted at 5.40% bid, 5.39% offered.

In the debt futures market, the March municipal contract settled up 1 5/32 to 103.22. The contract hit a high of 103.25 off of a low of 102.20. The MOB spread widened to negative 403 from negative 381 on Tuesday, as government prices climbed higher than municipals.

Reflecting the better bid for bonds, The Blue List slipped $30 million, to $2.004 billion from $2.034 billion on Tuesday.

Since hitting $1.172 billion on Dec. 8, it's lowest level since the $1.097 billion on Sept. 14, the measure of dealer inventory climbed inexorably higher to $2.034 billion on Dec. 21, a gain of $862 million in only nine business days. Buyers stepped away from the market, leaving the Street to handle the last new-deal rush by issuers. In that same period, the market had to absorb $14.76 billion in new-issue note and bond volume.

So far in the fourth quarter of this year, The Blue List has averaged $1.74 billion, compared with $1.69 billion in the third quarter. Through Dec. 22, dealer inventory has averaged $1.58 billion.

But forward supply has dissipated and The Bond Buyer's 30-day visible supply dwindled from $7.63 billion on Tuesday Dec. 14 to $2.90, billion yesterday, its lowest total since Sept. 16 when it was $2.16 billion.

In the short-term note sector, yields were narrowly mixed on the day, traders said.

In late action, California Rans were quoted at 1.95% bid, 1.92% offered; New Jersey Trans were quoted at 2.04% bid, 2.01 % offered; and New York City Tans were quoted at 2.10% bid, 2.07% offered.

In light new-issue action, Chemical Securities Inc. priced and repriced $120 million of Nassau County, N.Y., Tans in the short-term sector.

Series B reoffering yields were raised about eight basis points at the repricing.

The final offering included $50 million Series A notes priced with a coupon of 2.50% for a return of 2.10%, due March 15, 1994. The remaining $70 million Series B notes priced as 3s to yield 2.68%, due Dec. 29, 1994.

The issue is rated SP-1 by Standard & Poor's.

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