Treasury note and bond prices improved yesterday on another weak economic report, and the long end also got a boost when stock prices bounced back from their early losses.

By late in the afternoon, the 30-year bond was up 3/8 point to yeild 7.90%, and short-term notes were up 1/8 to 1/4 point.

Traders said short-term securities are being supported by expectations that the federal Reserve will lower interest rates again. The bigger-than-expected drop in the National Association of Purchasing Management's November index provided additional evidence that the economy needs further stimulus fromthe Fed.

And the long end atypically decided to celebrate the stock market's rebound on the theory that if stocks improve, congressmen will be less likely to enact the tax cuts traders fear.

For a Monday, there was a fair amount of price movement, but traders said flows were limited.

Treasury prices improved overnight in Japan when the Nikkei index of stock prices fell 695.06 points, a 3.1% drop, to 21,992.29. That was the first time the index fell below 22,000 in three months.

Traders watched U. S. stock prices closely, and a first the Dow Jones industrial average seemed inclined to follow the Nikkei's example. But after falling almost 30 points in early trading, the Dow stabilized and began to climb higher.

By the close, the Dow was 40.70 points higher at 2,935.38.

"Stocks have had an almost 70-point reversal, but the front end hasn't given up any ground," said Michael Strauss, an economist at UBS Securities. "People are generally expecting a weak employment number Friday that could create the potential for another Fed move."

Another factor aiding the short end was the news that the national purchasing managers' index fell to 50.1% in November from 53.5% in October. that was weaker than the 52% consensus forecast.

The purchasing managers association says a reading above 50% means the manufacturing sector is expanding, while a reading below 50% means it's contracting.

The November reading was "right on the cusp," said Aubrey Zaffuto. "It means the economy is Advisory. "It means the economy is stalling, basically."

Ms. Zaffuto said it was possible the index will drop below 50% in December or January given the weak demand seen in October and November.

Joan Schneider, a money market economist at Continental, said the index is still well above the January low of 37.7%.

The report "reinforces uncertainties about how things are going to unfold in the future," Ms. Schneider said. "I don't think we're slipping back into recession, but the cyclical recovery is being dampened by structural problems that aren't going to go away soon."

The 10-year note outperformed everything else on the curve yesterday. The head of a government trading desk said its strength reflected an extension trade totaling about $500 million, remarking,

Treasury Market Yields

Prev. Prev.

Monday Week Month

3-Month Bill 4.46 4.54 4.84

6-Month Bill 4.56 4.66 4.95

1-Year Bill 4.64 4.72 4.99

2-Year Note 5.31 5.49 5.62

3-Year Note 5.67 5.84 5.91

4-Year Note 5.78 5.94 6.05

5-Year Note 6.41 6.58 6.72

7-Year Note 6.85 7.03 7.15

10-Year Note 7.29 7.45 7.48

15-Year Bond 7.63 7.72 7.79

30-Year Bond 7.90 7.98 7.94

Source: Cantor, Fitzgerald/Telerate

"Somebody sold a slug of three-years and bought a slug of 10-years."

Even the 30-year bond posted decent gains, and some participants said worries about possible congressional measures to mend the economy had reversed the market's normal reactions.

"It's the opposite of what you would think: Strong numbers for the economy are good for the long end because Congress won't enact some kind of tax cut," a coupon trader said. "That thought process is going around."

This morning, the market gets the October leading indicator and new home sales reports. Economists surveyed by The Bond Buyer expect no change in leading indicators and a 4.3% rise in new home sales, reversing part of the big 12.9% decline in September. But traders said today's indicators would be overshadowed by the November employment report due out on Friday.

"Everybody's expecting a weak employment report and that should keep a bid in the market," a trader said.

The consensus forecast is for a 35,000 decline in November payrolls, and analysts said a big downward revision to October's 1,000 decrease is also likely.

The March bond futures contract closed 11/32 higher at 99 5/32 and the December contract was also up 11/32, at 100 3/32.

In the cash market, the 30-year 8% bond was 11/32 higher, at 101-101 4/32, to yield 7.90%.

The 7 1/2% to 10-year note rose 9/16, to 101 9/32-101 13/32, to yield 7.29%.

The three-year 6% note was up 5/32, at 100 26/32-100 28/32, to yield 5.67%.

Rates on Treasury bills were mixed, with the three-month bill up one basis point at 4.37%, the six-month bill up one basis point at 4.41%, and the year bill two basis points lower at 4.44%.

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