The Federal Reserve took no credit tightening action yesterday and Treasury prices fell, leaving the short end largely intact but chipping away more than half a point from the long bond.

With the Federal Open Market Committee's doors closed until midafternoon, traders were kept on the edge of their seats and uncertain of what to do for most of the day. When the Fed finally announced that the FOMC meeting was over with no change in rates, traders got busy and sparked selling in the long end because their inflation fears were not laid to rest. Economists expect a tightening of monetary policy at the next FOMC meeting on Nov. 15, if not sooner.

The Treasury's Dutch auction of two-year notes, which yielded 6.55%, complicated yesterday's market activity. While the market liked the issue's 6 1/2% coupon, the two-year could have rallied if traders hadn't been watching for activity at the FOMC meeting.

The auction was held an hour and a half before the FOMC announcement came, and the two-year note's yield came in at the highest since July 1991.

Total bids came to $44.033 billion, and $17.267 billion in bids were accepted, with high-yield bids awarded 14%. The bid-to-cover ratio was to-1, compared with a 2.68-to-1 ratio at the last 12 Dutch auctions of two-years.

At midday, the two-year note was bid at 6.53% in when-issued trading. Of competitive bids accepted, 5% were tendered at or below 6.45%.

Before the auction results were announced, Elias Bikhazi, vice president and financial economist with Deutsche Bank Securities Corp., said he would not be surprised if the auction was not bid tightly because of uncertainty about the FOMC.

The short end, in general, is looking increasingly better to traders now that the Fed has decided not to tighten credit conditions for now. Treasury bills built in a 25-basis-point tightening last week, and the market did better yesterday as a result, according to Steve Ricchiuto, chief financial economist at Barclays de Zoete Wedd Securities Inc.

The market knows that the Fed is going to have to tighten down the road, Ricchiuto said, so it is continuing to build in the inflation premium across the yield curve.

The benchmark 30-year Treasury bond closed down 17/32 yesterday, to yield 7.83%.

The 10-year Treasury note was down 1/4 to yield 7.59%. The seven-year note was down 7/32 to yield 7.41%, and the five-year was down 3/32 to yield 7.21%.

The yield on the three-month bill was down six basis points to 4.833%. The yield on the six-month bill was down five basis points to 5.35%, and the yield on the one-year was down two basis points to 5.86%.

More reason to tighten came with the release of the Johnson Redbook weekly survey after yesterday's FOMC meeting. Retail sales for the first four weeks of September rose 2.6% from August on a seasonally adjusted basis and sales for the first three weeks were up 3%, the survey said.

Many traders were convinced early in the day that the Fed would not tighten, but they proceeded with caution anyway.

"You sit here and wait to see what the Fed does," said one note trader. "And realistically, they'll do nothing."

The trader said the market had tightened already in anticipation of a Fed move, and he didn't expect a rally yesterday. "Maybe you do rally and the curve steepens, but that doesn't mean much. It just means the Fed will tighten next month," he said.

Another cautious trader with a primary dealer saw "very small positions floating around" before the FOMC announcement and more buyers in the short end than the long end.

"If there was a tightening, it would surprise more people than if there wasn't one," the trader said. "If anything bodes for the Fed not to do anything, dealers are going to have just bid the [two-year] auction. For them to come and tighten right after that, they'd [anger] some people. They would have tried to enlighten us before now."

But Michael Strauss, chief economist at Yamaichi International America, countered that "the Fed does what it needs to do," pointing out that it tightened in March on the day of a note auction.

Now that the FOMC has met, the market can turn to other concerns, such as today's report on durable goods orders for August. Orders are expected to be higher than the previous month. Players are looking to liquidate positions ahead of the durable goods numbers, Strauss said.

Also today, the Treasury is set to auction $11 billion of five-year notes.

Early in yesterday's trading session, the Conference Board reported that its index of consumer confidence fell to 88.4 in September from a revised 90.4 in August. The measure was even higher in June, at 92.5.

"In the latest survey, respondents are markedly less positive than in August in their assessment of ongoing economic conditions, but only slightly less optimistic in their expectations for the months ahead. Buying plans are also somewhat weaker," the survey said.

Despite that good news for bonds, the market held in its Fed-watching trance and remained unmoved by a figure that might have excited it on a quieter day.

"Consumer confidence numbers are largely meaningless against the backdrop of a Fed action," a trader said.

The dollar also tumbled when the Fed failed to tighten yesterday, and was quoted at 1.5430 German marks and 98.07 Japanese, yen late in the day.

The December Treasury bond futures contract closed down 18/32 at 98.23.

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