Municipals lost 3/4 to a full point yesterday as a jump in factory orders became the latest sign of economic muscle to unnerve the credit markets ahead of tomorrow's September employment report

"It's just that the bearish tone continues, there's potentially damaging news at the end of the week, and if that were to occur, forget about 8%, you're going to see the long bond blow right through 8%," one trader said.

In light to moderate secondary activity, dollar bonds were down 7/8 to one point, while yields on high-grade bonds rose by seven basis points, a municipal analyst said. In debt futures, the December municipal contract settled down 22/32 at 86 1/32. Yesterday's December MOB spread was negative 376 compared to negative 372 on Tuesday.

The trader described bid lists as "consistent," but said the flow was lighter than Tuesday, which proved the biggest volume day in about a month. Tuesday's lists totaled $400 million to $500 million, while yesterday's totaled about $200 million, the trader said.

Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson, attributed yesterday's declines to a culmination of factors highlighted by the factory orders report.

"Usually, the factory orders number is not that important, but it was kind of the straw that broke the camel's back," Wesbury said.

The Commerce Department yesterday said new orders for manufactured goods jumped 4.4% in August, the biggest gain since December 1992.

If factory orders had been up 3.3% to 3.4%, as was the consensus forecast, a case could have been made that the rise just offset last month's declines, Wesbury said.

"But because we were up so much more than consensus, we not only made up for last month's decline but even saw an acceleration from [the] growth rates of earlier this year," he said. "So this data pounds home the fact that the economy is strong and may even be accelerating."

In addition, because factory orders, or any orders for that matter, point toward future growth, it suggests that if orders were this strong in August, employment in manufacturing could pick up even further than people thought in September, Wesbury said.

"Which would make Friday's employment report even more worrisome than it was before," he said.

Wesbury said that most investors probably had believed until recent days that the Federal Reserve was going to wait until its Nov. 15 meeting to tighten monetary policy. However, the economic indicators released lately have increased the probability of a tightening soon, which also bothers the market, he said.

While Wesbury thinks there's a 75% chance that the Fed will tighten on Friday if an unfavorable employment report arrives, it's possible the Fed could hold off for political reasons.

"If the Fed moves on an employment day, it basically says that the Fed is against employment, which is never good for the politicians or the party in power," he said. "Politically, it's better for the Fed to go on an inflation number that's a little worse than consensus. I would say that the odds of having a Fed rate increase by [Oct.] 13 and [Oct.] 14, when we have the PPI and CPI, are 100%."

Yesterday's factory report also showed that inventories rose 0.1% in August, which suggests that third-quarter economic growth may come in stronger than people expected, he said.

"That at least in my view was the big wild card," Wesbury said. "I'm forecasting 3.5% to 4% real growth. I would be wrong if inventories actually declined.

In competitive action, a Merrill Lynch & Co. group won $160 million of Maryland general obligation bonds with a true interest cost of 5.692586%. The offering consisted of serial bonds priced to yield from 4.50% in 1997 to 5.90 in 2008. A 2009 maturity was not formally reoffered.

Maryland Treasurer Lucille Maurer said she was pleased with bids, given yesterday's down market.

"It was 5.69%, just under 5.7%, and I think that shows what a strong position we have given the market," Maurer said. "You have a shortage of paper, of triple-A paper, but you know day-to-day it's been uncertain, so we're very pleased."

Chemical Securities had the cover bid with a TIC of 5.734046%, Maurer said.

"That shows Merrill was aggressive," she said. CS First Boston came in third with 5.756747%, followed by Prudential Securities with 5.794693% and Dillon, Read & Co. with 5.805182%

Maurer noted the offering received a triple-A rating from Moody's Investors Service, Standard & Poor's Corp. and Fitch Investors Service. "We're proud or' our position in the market," she said.

Of the offering's proceeds, public schools will get $26.3 million, community colleges will get $14 million, $5.85 million will go toward improving the water quality in Chesapeake Bay, public safety and correctional institutions will get $43 million, local jails will get $6 million and $43.55 million will be earmarked for general construction, including a variety of state buildings and hospitals. Another $21.3 million will go toward miscellaneous items including an open space program.

Also yesterday, a Goldman, Sachs & Co. group won $100 million of Port Authority of New York and New Jersey revenue consolidated bonds with a true interest cost of 6.5884%

"We are certainly pleased, and hopefully Goldman will do well with the deal," said Bruce D. Bohlen, assistant treasurer at the authority.

J.P. Morgan Securities had the cover bid with a 6.6513% TIC, and Merrill Lynch followed with 6.6605% Kidder came next with 6.6703%; followed by Bear, Stearns & Co. with 6.6712%; and Chemical with 6.7 100%.

Bohlen said the authority was "a little bit nervous," given yesterday's tough market. However, yesterday's offering is a refunding of $100 million 59th series consolidated bonds issued in 1988, and it "still gives us significant savings." The authority decided to sell bonds now rather than wait and possibly be exposed to higher interest rates later, Bohlen said. He estimated that the authority would achieve $12 million of net p.resent value savings.

The FGIC-insured offering consisted of serial bonds, priced to yield from 5.65% in 2003 to 6.52% in 2016. A 2023 term, containing $47.8 million, was priced to yield 6.65%.

In the negotiated sector, a Dillon, Read & Co. group priced $241 million of New York State Thruway Authority highway and bridge trust fund bonds. The offering featured a top yield of 6.431% in 2014. The deal was not repriced, a source familiar with the offering said.

The 30-day supply of municipal bonds yesterday totaled $3.35 billion, up $319.1 million from Tuesday. That comprised $1.588 billion of competitive bonds, down $93.6 million from Tuesday, and $1.76 billion of negotiated bonds, ap $412.7 million.

Standard & Poor's Blue List of municipal bonds gained $18.1 million yesterday to $1.94 billion.

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