With that cam and compression setup you got I'd go with the 1-7/8" primaries, but good luck finding something that fits decent without major modifications on those D150s.
With that cam and 10:1 compression I'd definitely go with the 1-7/8" primaries, TTI makes good stuff but yeah they're pricey - might also check Hooker or Hedman if you're on a budget and don't mind some fitment work.
Try checking AllData or Mitchell1 online, some libraries have free access to those databases and they usually have the factory diagrams for those oddball 86-87 years.
It's 45 here right now but supposed to drop to the 20s by weekend - this crazy up and down weather is making it tough to know when to switch to winter diesel!
I'd try the heater hose with clamps if it's the flexible type that slides over the metal stub - just make sure you get the right diameter so it fits snug.
Sounds like you might have the wrong valve body or there's something going on with the transfer case binding up when you hit reverse - I'd check if the NP208 is shifting properly between 2WD and 4WD.