The market has taken on a herd mentally and investors continue to graze on the growing scarcity of the 30-year bond.

The short end of the market has also maintained a solid bid, but most investors thought the grass looked greener on the other side of the market.

Supported by weak economic data and a lack of inflationary pressures, the long bond continued its rise to the stars and managed to hit yet another record low yield yesterday, closing up more than 3/4 of a point to yield 6.19%.

"The bond is trading away from the rest of the market in a big way," said Steven Wood, director of financial markets research at Bank of America in San Francisco. "The performance of the long end is also helping the rest of the market."

Buying at the long end has been mostly speculative in nature as players placed bets on how much lower the yield on the 30-year issues can go.

But broad-based demand for the long bond has benefited all sectors of the market. Traders said that the vast majority of speculative accounts are positioning themselves in the short and intermediate sectors to benefit from the narrowing spread between the yield on the 30-year issue and other instruments of shorter maturity.

Japanese buying of Treasuries perked up again yesterday, accelerated by the dollar's sharp rise against the yen. Analysts said money flowed out of the Japanese government bond market and into Treasuries, particularly the 10-year -- the instrument most closely matched to the JGB's benchmark 10-year bond.

The U.S. 10-year note also faced selling pressure. Trades attributed the activity to large amounts of hedging against this week's deluge of corporate debt as underwriters scramble to take advantage of the lowest Treasury yields in 16 years.

So far this week, 38 issues totaling $7.072 billion of nonconvertible corporate debt have been priced, according to Securities Data Co. Four junk issues totaled $1.0756 billion and 34 high-grade issues totaled $5.996 billion. The nonconvertible debt tracked by Securities Data includes agencies, but excludes mortgage-backed and asset-backed paper.

While the long bond has rallied in recent sessions on little more than bullish market sentiment, fresh news yesterday morning brought economic fundamentals back to the forefront.

The U.S. merchandise trade deficit surged 44% in June to $12.1 billion as imports advance and exports fell, the Commerce Department reported.

The news confirmed the market's view that the U.S. economy is staggering along at a slow pace and pointed toward a downward revision in second-quarter gross domestic product.

Exceeding analysts' expectations, this is the largest monthly trade gap in five years. The trade deficit in May fell 17.7% to $8.4 billion. U.S. imports increased 5.1% in June to an all-time high of $49.7 billion, following a 2.8% decline in the previous month.

The import gain in June resulted from increases in capital and consumer goods, industrial supplies, and vehicles and parts, among other things. Exports declined 3.3% in June to $37.6 billion, after a 1.2% advance in May. The June drop reflected declines in essentially the same basket of goods that caused the gain in imports, with the exception of capital goods.

"The report is pretty disgusting," said Mary Dennis, economist at Merrill Lynch. "The trade figures are probably going to result in a downward revision in second quarter GDP of about 1.5%.

Dennis added that the latest round of trade figures could foreshadow weakness in the third quarter.

Michael Moran, chief economist at Daiwa Securities, also found little to cheer about in the latest trade report. He said that even though the final sales component of the report looked relatively strong, the important development was that most of that consumption was in foreign goods.

"The report showed that demand was stronger, but foreign producers are getting the benefits and the U.S. isn't," Moran said. "Overall, this is a positive report for the bond market and a negative one for the U.S. economy."

The market also received some encouraging news from the manufacturing sector. A business outlook survey from the Federal Reserve Bank of Philadelphia showed that a summer slump is continuing in that sector.

The diffusion index for general business activity increased from minus 10.3 in July to minus 8.7 in August. The index, which has remained negative for three consecutive months, indicates that manufacturing growth has weakened relative to the pace experienced earlier in the year.

Elias Bikhazi, money market economist at Deutsche Bank, said the report was consistent with other signs of weakness in manufacturing and should translate into a decline of about 20,000 manufacturing jobs in August.

"There's no sign of firmness on the manufacturing side of the economy," Bikhazi said.

In other international news, market observers said that the U.S. dollar's reversal against the Japanese yen yesterday is likely to provide Treasuries with a steady flow of buying interest in coming sessions.

Lawrence Sommers, the Treasury undersecretary for international affairs, said yesterday that the United States is concerned about the recent rise in the yen, citing the Treasury's position that excessive volatility in the foreign exchange market can disrupt world economic growth. That statement, coupled with numerous attempts by central banks to prop up the level dollar, helped reverse the yen's recent ascent against the U.S. currency and made yen-denominated investment instruments less attractive. It also helped calm fears of dollar-denominated inflation.

Observers said the JGB's benchmark 10-year bond fell more that 10 basis points yesterday as the dollar yen hit 106. Analysts look for a move up to 107 in the next few sessions.

Alison Gibbs, currency analyst at MMS International, said that the dollar should continue to appreciate against the yen in coming sessions. "We look for the dollar to improve at least moderately against the yen in the next few sessions and for funds to continue to move out of the JGB and into Treasuries and European bond markets," Gibbs said.

Elsewhere, the Labor Department reported that initial state unemployment claims fell 6,000 to a seasonally adjusted 325,000 in the week ended Aug. 14. The last time initial claims were this low was Feb. 13. The decline pushed the four-week moving average down 6,750 to 347,5000. The prior week's revised average was 354,250.

Daiwa's Moran said that the employment figures were "neutral" for the market, given that claims figures have bumped around considerably in recent months and still remain vulnerable to distortions from flooding in the Midwest.

Late yesterday, the Federal Reserve reported its weekly measures of monetary growth. It reported that M1 fell $100 million, M2 fell by $5.1 billion, and M3 declined $2.6 billion.

In futures, the September contract ended up 8/32 to 116.18.

In the cash markets, the 4 1/4% two-year note was quoted late yesterday up 3/32 at 100.20-100.21 to yield 3.89%, the 5 1/4 five-year note ended up 10/32 at 101.09-101.11 to yield 4.94%, the 6 1/4% 10-year note was up 14/32 at 101.00-101.02 to yield 5.60%, and the 7 1/8% 30-year bond was up 25/32 at 100.22-100.24 to yield 6.19%.

The three-month Treasury bill was down one basis point at 2.98%, the six-month bill was down one basis point at 3.10%, and the year bill was down three basis points at 3.24%.Treasury Market Yields Prev. Prev. Thursday Week Month3-Month Bill 3.02 3.06 3.146-Month Bill 3.17 3.22 3.301-Year Bill 3.34 3.43 3.542-Year Note 3.89 4.04 4.173-Year Note 4.26 4.43 4.495-Year Note 4.94 5.12 5.207-Year Note 5.22 5.40 5.5510-Year Note 5.60 5.76 5.8830-Year Bond 6.19 6.43 6.65Source: Cantor, Fitzgerald/Telerate

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