As interest rates climbed, municipal bond dealers continued to see. underwriting spreads shrink during the first half of 1994.

The average gross underwriting spread declined to $8.02 per $1,000 par value during the first half of 1994, down from $8.38 at the end of 1993, according to Securities Data Co.

The gross underwriting spread earned by a dealer is the difference between the price paid to an issuer for bonds and the price the public pays for the securities. The gross spread comprises four sources of revenue: the management fee, the underwriting fee, expense payments, and the average takedown.

Despite the overall decline, three of the components that make up the average spread increased in the first half, Securities Data's information shows.

The management fee, which is the compensation that underwriters earn for structuring and overseeing negotiated financings, rose slightly to 97 cents per $1,000 par value from the yearend 1993 rate of 93 cents.

The underwriting fee more than doubled to $1.14 from 50 cents. The fee is the compensation received by syndicate members.

Expenses -- compensation for computer runs, travel, the cost of borrowing federal funds, and other items climbed to $1.11 per bond from 96 cents.

Meanwhile, the average takedown, which is the largest component of the spread, declined to $5.17 from $5.99.

The reasons for the spreads' erosion are declining issuance, market volatility, and the increased competition among dealers to underwrite issuer debt.

In fact, competition is so great that two spread components -- underwriting fees and management fees -- are often eliminated, some dealers said. On more complex financings, the fees generally are reinstated.

During the first half of 1994, issuance declined 40%, to $89.18 billion from $149.13 billion.

As negotiated issuance plunged a hefty 48%, to $62.06 billion from $120.27 billion, spreads on those deals also dipped to $8.10 from $8.48 per bond. Competitive volume fell a modest 3.1% to $26.76 billion, compared with $27.61 billion last year.

In correlation with the limited decline in competitively sold debt, spreads on the issues bumped up to $7.68 from $7.64.

As new-money financings made up most of first-half issuance, spreads on those issues narrowed considerably, to $7.83 per bond, from $9.14 per bond at the end of 1993. Refunding spreads widened slightly to $8.25 from $8.16 per bond.

In various market sectors, most spreads showed minimal movement.

Housing bond spreads declined to $8.67 per bond from $8.96. Health care spreads slipped 40 cents to $9.30 per bond from $9.70. Spreads on general purpose financings narrowed to $6.64 per bond from $7.58 at the end of 1993.

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