Short-covering lifts market as traders anticipate Fed tightening.

Treasury prices rebounded yesterday as accounts sought to cover short positions ahead of the Federal Reserve's Open Market Committee meeting next Tuesday.

Trading was light and the overall tone remained negative, but even modest short coverings were sufficient to drive prices higher as most players were unwilling to make major moves before the FOMC meeting on Tuesday. The benchmark 30-year Treasury bond ended the session up over 1/4 point, to yield 7.77%. Comments from former Federal Reserve vice chairman David W. Mullins that a 50-basis-point tightening might not be necessary helped bolster sentiment and allowed players to ignore further evidence of a strengthening labor market.

Going into yesterday's session, the Treasury market was in tatters after a series of strong economic indicators in recent weeks and comments this week by former Fed governor Wayne Angell and Goldman Sachs economists that a 50'basis-point tightening was likely by the end of the month.

With little concrete economic data being released this week, the market was resigned to .search for guidance from a variety of sources. And a much-needed boost was provided by Mullins, who resigned as Fed vice chairman earlier this year. The Washington Post quoted him yesterday as saying that a 25-basis-point tightening would be sufficient.

Economists and Fed watchers are mixed in their predictions of whether the Fed will move by the end of September, and to what degree.

Market traders, however, have clearly priced in another Fed move of the 50-basis-point variety in an effort to avoid getting caught by surprise, and continue to sell out of the short end of the curve.

The less inflammatory tone of the U.S.-Japan trade negotiations also helped spur the market's uptick yesterday. President Clinton and Japanese Foreign Minister Yohei Kano agreed to try to Mach an agreement before the end of the month, the deadline set by the Clinton Administration for trade sanctions to be imposed by the U.S.

In late New York trading yesterday, the dollar was quoted at 98.00 Japanese yen and 1.5460 German marks, compared with 97.75 yen and 1,5462 marks the previous day.

Meanwhile, the Labor Department reported that initial state unemployment insurance claims fell 7,000 to a seasonally adjusted 320,000 in the week ended Sept. 17. The figure exceeded most economists' expectations and could portend a strong employment report on Oct. 7.

The dilemma is that the Fed meets before the release of the employment report. Fed chairman Alan Greenspan has repeatedly stated that capacity utilization and labor strength are the two main indicators he considers in examining inflationary trends. With a strong capacity utilization number in hand, some economists say the Fed might use the initial claims reports to project what the employment figure will be and proceed with a tightening.

"When the Fed meets on the 271h, it won't have the benefit of payroll employment data" for September, said Anthony Chan, chief economist at Banc One Investment Advisors. "The only thing the Fed can use is expectation of payroll employment," noting that such extrapolations are not always reliable.

In addition to the strong initial claims number, the report also included firmer continuing claims and four-week moving averages, Chan noted.

The four-week average of state un - employment claims for the week of Sept. 17 fell to 327,500 from 328,250.

While the "overall trend implies further labor market improvements," Chan said, "the talk of a Fed having to do less than a 50-basis-point tightening overran the negative effects of a slightly firmer labor market."

Separately, the Treasury Department reported that the federal budget deficit was $24.17 billion in August, compared with $33.2 billion in July, Through the first 11 months of fiscal 1994, which ends Sept. 30, the federal deficit stood at $207.27 billion, down from $263.82 billion in the first 11 months of fiscal 1993. Corporate Securities

Spreads on Borden lnc.'s debt widened yesterday on the news that Paul B. Kazarian's investment firm, Japonica Partners, had made a $16 to $18 per share offer for 20% to 90% of the company.

Last week, Borden agreed to be acquired by Kohlberg, Kravis, Roberts & Co. for $2 billion, or $14,25 per share. Kazarian's offer, which outstripped the previous agreement, coupled with statements by Borden officials that they would proceed with the Kohlberg Kravis deal, raised uncertainty and sent Borden's bonds reeling by as much as 25 basis points, traders said.

In the secondary market for corporate securities, spreads of investment-grade bonds tightened from 1/8 to 1/4 point in sympathy with Treasuries, while high-yield bonds were mixed in quiet trading.Treasury Market Yields Previous Previous Thursday Week Month 3-Month Bill 4.90 4.67 4.636-Month Bill 5.38 5.12 5.051 Year Bill 5.88 5.59 5.542-Year Note 6.49 6.28 6.183-Year Note 6.78 6.58 6.455-Year Note 7.19 7.00 6.837-Year Note 7.38 7.19 7.0110-Year Note 7.55 7.38 7.1930-Year Bond 7.80 7.66 7.45

Source: Cantor, Fitzgerald/Telerate

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