WASHINGTON -- Despite strong economic reports, Treasury notes and bonds rallied yesterday, causing a dramatic flattening of the yield curve.

Late yesterday, the benchmark 30-year bond was quoted up 22/32 at a price of 96 26/32, pushing the yield down to 7.77%. The 10-year note was up 15/32 at 100 24/32, yielding 7.76%.

Meanwhile, the short end slipped a little. Yields on three-month and six-month bills were up slightly at 5.71% and 6.51%, respectively. Year bills were unchanged, yielding 7.17%.

Two-year notes were little changed at 99 20/32, yielding 7.70%. The spread between yields of two-year and 30-year securities tightened to a remarkably narrow seven basis points.

Analysts and traders said the flatness of the yield curve is premature, given the continuing string of strong economic reports. They speculated that the long end is vulnerable to a correction early next year.

Trading was very thin yesterday, which analysts warned can mask true market sentiment. Trading is expected to remain light until after Jan. 1.

The Conference Board yesterday reported that its index of consumer confidence rose more than expected in December, to 102.2 from 100.4 in November. Also, the Johnson Redbook report indicated that department and chain store sales were up 3.3% in the week ended Dec. 24 compared with the previous month, and were up 10% from the previous year.

Treasury Market Yields Previous Previous Tuesday Week Month3-Month Bill 5.60 5.68 n.a.6-Month Bill 6.47 6.46 n.a.1-Year Bill 7.15 7.06 n.a.2-Year Note 7.70 7.50 n.a.3-Year Note 7.80 7.63 n.a.5-Year Note 7.83 7.71 n.a.7-Year Note 7.83 7.77 n.a.10-Year Note 7.82 7.79 n.a.30-Year Bond 7.85 7.86 n.a.

Source: Cantor, Fitzgerald / Telerate

Stats

Stock Market: The Dow Jones Industrial Average rose 28.26 points yesterday, to close at 3861.69.

Foreign Exchange: In late New York trading yesterday, the dollar was quoted at 100.42 Japanese yen and 1.5755 German marks.

Commodities: The Commodity Research Bureau's index closed up 0.76 point yesterday, at 236.19.

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