Long bond keeps rallying, and pulls money from other markets.

The long end of the Treasury market is experiencing a kind of gentrification as low yield levels are prompting money to migrate from other markets.

The 30-year bond was up 21/32 to yield 5.89%, the lowest level since 1977 when the Treasury began auctioning bonds on a regular basis. The issue hit 5.85% briefly at midday.

In July, the long end of the Treasury market experienced a capital flight brought on by Federal Reserve Chairman Alan Greenspan's warning of higher inflation and tighter monetary policy.

Two months later, inflation remains low, and the long end is the place to be for investors looking for price appreciation and declining yields.

Market participants said the ability of the 30-year bond to- stay below the 6% yield level this week has made the Treasury market the fixed-income market of choice. Thus, money moved into Treasuries from a variety of sources, including retail accounts, central banks, state and local governments. and mortgage market participants.

Behind much of the move into Treasuries is the growing fear that there won't be enough paper to go around, traders said, noting that the last round of auctions were held three weeks ago, and the next sale of Treasuries is not scheduled for another two weeks.

Long bonds, in particular, are in short supply now that the Treasury is auctioning 30-year issues every six months instead of quarterly. The drought of long-dated paper has created scarcity value for long bonds and fed a buying frenzy at the long end.

"It's a supply and demand trade," said Matthew Alexy, senior market strategist at First Boston Corp. "There's not enough supply to go around, and the market is trading as if it fears that the situation will get even worse."

Fueled by bright prospects on inflation and broad-based buying interest the rally in long-dated Treasuries continued yesterday and gave few signs of petering out.

Bond market participants scratched their heads yesterday as prices on their broker screens continued to rise, forcing them to chase the market.

Most predicted that a correction would follow last Friday's sharp rally. Instead, buyers emerged yesterday and extended one of the most significant bond market rallies of the post-world War II era.

"There was nothing people could do but buy the market because it wouldn't go lower," Alexy said.

Price gains began early in the session as a drop in commodity prices pushed the market higher and sparked a short covering rally. That move higher was met by strong buying from retail accounts, state and local governments, and mortgage market participants.

Traders also reported scattered central bank interest from the Fed and the Bank of Japan. Talk in the market was that the Fed was buying off-the-run five-year notes, and the Bank of Japan was buying 30-year bonds.

The 10-year benefited from money flowing out of mortgage-backed securities and into Treasuries. Prepayments in the current low interest rate environment continued to leave investors holding cash rather than bonds. Most of that money is being invested in the intermediate sector of the Treasury market.

Municipal defeasance supported the intermediate and long sectors of the yield curve, traders said, noting that with the long bond trading below 6%, many state and local governments are scrambling to put money into Treasuries.

"You had a number of factors pushing the market higher and bringing in buyers," said Michael Strauss, chief economist at Yamaichi Securities. "It's obvious that the rally is still on."

Because much of the recent rally has been fueled by expectations for weak growth and inflation, market participants see few obstacles in the way of lower yields.

The employment report for August provided further evidence that the economy is growing slowly but is not creating jobs or fueling inflation. Against that backdrop, observers are forecasting lower yields for the market.

"A lot of the rally was based on favorable inflation outlook, and if the next round of inflation numbers look good, it will give people even more confidence in the market," said Michael Moran, chief economist at Daiwa Securities.

But some participants believe that a correction is badly needed and predict that it could come sooner that most people think.

Hugh Johnson, chief investment officer at First Albany Corp., is advising the firm's clients to take a more defensive stance on the Treasury market.

Johnson believes that the market has topped out and that further price appreciation is unlikely. However, he is recommending that clients hang onto their bonds until the market shows signs of reversing its recent trend.

"You've got to get on board and ride the market, but be prepared to get off when the trend changes," he said.

In futures, the September contract ended up 22/32 to 122.00.

In the cash markets, the 3 7/8% two-year note was quoted late yesterday down 2/32 at 100.08-100.09 to yield 3.72%: the 4 3/4% five-year note ended up 1/32 at 100.17-100.19 to yield 4.61%; the 5 3/4% 10-year note was up 6/32 at 103.22-103.24 to yield 5.26%; and the 6 1/4% 30-year bond was up 21/32 at 104.29-104.31 to yield 5.89%.

The three-month Treasury bill was down one basis point at 2.94%; the six-month bill was up two basis points at 3.06%: and the year bill up three basis points at 3.16%.Treasury Market Yields Prev. Prev. Tuesday Week Month3-Month Bill 2.98 3.05 3.086-Month Bill 3.12 3.19 3.251-Year Bill 3.25 3.36 3.482-Year Note 3.72 3.85 4.083-Year Note 4.03 4.17 4.365-Year Note 4.61 4.78 5.127-Year Note 4.85 5.03 5.4210-Year Note 5.26 5.44 5.8030-Year Bond 5.89 6.09 6.44

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