A drop in Treasury prices pushed municipals 1/2 point lower late yesterday but new deals suffered only a slight jolt.

Treasury prices fell more than one point after weak results were reported from the sale of $10 billion of 30-year bonds, the last leg of the August refunding.

Municipals did not suffer as severely as the government market, but the plummet in Treasuries proved to be a bane for supply-strapped tax-exempt traders, who are also still suffering from wounds sustained during last week's price correction.

"We've been struggling all week with supply," a trader said. "As soon as Treasuries fell, people ran for cover."

By session's end, cash prices were quoted down 1/2 point on average, traders said. In the debt futures market, the September municipal contract settled down 17/32 to 98.18. The MOB spread narrowed to negative 225 from negative 245 Wednesday.

But issuers have been flocking to the market to take advantage of still-low interest rates, and supply is only expected to increase, clouding near-term price prospects.

"If we can't hold onto these levels right here, we could drop again with the long bond hitting 7.50%," a trader said. "There are just too many bonds around in munis, and it's going to take us awhile to digest it all."

Before the poor auction results were realized, the credit markets had been firmer, thanks to a downward revision to retail sales and comfortable inflation levels.

Retail sales in July increased 0.5% with gains in both durable and non-durable goods. Revised sales in June fell 0.3%, reversing the previously reported 0.5% increase.

The consumer price index for all urban consumers rose 0.1% in July after a 0.3% gain in June. Initial state unemployment insurance claims fell 66,000, to a seasonally adjusted 403,000 in the week ended Aug. 1.

New Issues

Market players said that demand for new deals atrophied after the sudden market downturn, but overall results were still positive.

"The market went into a state of shock after Treasuries got hit," a trader said. "You could have had a great deal on your hands and then it could go bad in a minute."

Leading action, Illinois awarded $600 million general obligation certificates, consisting of $300 million dated Aug. 20, and due March 15, 1993; and $300 million dated Aug. 20 and due May 15, 1993, to Lehman Brothers with a bid of 3.25%.

A Lehman officer said the deal saw good investor demand, adding that the deal may have been bolstered as the Treasury market dropped because it appeared investors sought safety at the short end of the curve.

An unsold balance was unavailable, but the firm reported "some good follow-through."

Lehman reoffered the notes to investor at 2.60% net.

The issue is rated MIG-1 by Moody's Investors Service and SP1-plus by Standard & Poor' Corp.

In long-term new-issue activity, Dillon, Read & Co. priced and repriced $350 million of New York State Thruway Authority general revenue bonds.

At the repricing serial bond yields were lowered by five to 13 basis points. Term bond yields in 2012 and 2019 were lowered by five basis points and the 2023 yield was lowered by about two basis points.

A Dillon Read officer said the deal was heavily oversubscribed and there was little Street float expected. The officer added that some business was lost after the market downturn, but the firm received the verbal award late in the day.

The final reoffering scale included serial bonds priced to yield from 3.625% in 1994 to 5.95% in 2008. A 2012 term, containing $50 million of the loan, was priced as 5 3/4s to yield 6.03%; a 2019 term, containing $111 million of the loan, was priced as 5 3/4s to yield 6.08%; and a 2023 term, containing $86 million of the issue, was priced as 5 1/2s to yield 5.984%.

The bonds are rated A1 by Moody's and A by Standard & Poor's, except for the 2023 term maturity, which is insured by the Financial Guaranty Insurance Co. and is triple-A rated by Moody's, Standard & Poor's and Fitch Investors Service.

In the competitive sector, $54 million of Knoxville, Tenn., various general obligation refunding bonds were won by a Merrill Lynch & Co. group with a true interest cost of 5.217%.

The firm reported an unsold balance of approximately $36 million late in the afternoon.

Serial bonds were reoffered to investors at yields ranging from 2.70% in 1993 to 5.75% in 2008.

The issue is rated Al by Moody's and AA-minus by Standard & Poor's

In follow-through business, Goldman, Sachs & Co. freed $255 million of Massachusetts Municipal Wholesale Electric Co. Power Supply System revenue bonds from syndicate restrictions.

In late secondary trading, the 6 1/8s of 2019 were quoted at 96 5/8-97 1/4 to yield approximately 6.38% on the bid-side. They were originally priced to yield 6.375%.

Merrill Lynch freed $139 million of Delaware GOs from syndicate restrictions and the First Boston Corp. freed $110 million of Farmington, N.M., Utility System revenue bonds from syndicate restrictions, but the bonds were not actively quoted.

Secondary Trading

Market players reported some bid-wanted flow during the session, including $15 million California Water 6s, which were offered behind 6.15%, but activity was minimal.

In secondary dollar bond trading, prices were quoted down 1/4 point to as much as 5/8 for some bonds, traders said.

In late action, New York City Water Authority 6s of 2017 were quoted at 96-1/4 to yield approximately 6.32% on the bid side; San Antonio Electric and Gas Systems 5 3/4s of 2011 were quoted at 95 5/8-96 to yield 6.14%; and Wisconsin Transportation 5 1/2s of 2022 were quoted at 91 1/4 to yield 6.14%. Los Angeles Department of Water and Power Authority 6s of 2032 were quoted at 97 1/2-3/4 to yield 6.16%.

In the short-term note market, yields were unchanged to five basis points lower in spots.

In late action, Iowa Trans were quoted at 2.90% bid, 2.85% offered; Los Angeles Trans were quoted at 2.75% bid, 2.70% offered; and Wisconsin notes were quoted at 2.85% bid, 2.80% offered. New York City Tans were quoted at 2.72% bid, 2.65% offered and New York State Trans were quoted at 2.85% bid, 2.80% offered.

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