Price action was choppy in the Treasury market yesterday, as traders responded to a string of comments by Federal Reserve officials, but by late in the day, long-term prices had posted small losses.

In late trading, the 30-year bond was 1/4 point lower on the day, and 5/8 point off the session highs, to yield 8.51%.

Prices drifted lower in overseas trading, then began to turn up when May housing starts came in close to expectations.

The market added to those grains during mornings as wire services reported a spate of comments by Federal Reserve Chairman Alan Greenspan, who spoke before the House Ways and Means Committee, and Governor David Mullins, who testified before the Senate Banking Committee. The committee is considering the nomination of Mr. Mullins as Fed vice chairman.

Mr. Greenspan and Mr. Mullins both said there were signs the economy may have touched bottom.

But traders took comfort when Mr. Greenspan said despite such signs, "we don't see any measurable upward thrust" in activity. Mr. Mullins's comments that the recovery might not be that strong and that "inflationary pressures appeared to have diminished in recent months" also were received favorably by the bond market.

A government bill trader said the gains yesterday morning reflected the market's mood rather than anything the Fed officials suggested about monetary policy.

The trader argued that it would have been just as easy to pick out unfavorable comments, such as Mr. Mullins's prediction of a positive third-quarter growth figure and his suggestion that it would be unwise for the Fed to ease again.

Jerry Gluck, an economist at Mitsubishi Bank, agreed that the comments only confirmed what most participants already believed, "that the Fed is not going to ease again anytime soon."

One clear signal was Mr. Mullins's comment that "it would be a mistake to lower interest rates again because long-term rates could well rise in response to that," Mr. Gluck said.

In any case, the price gains were short lived, and early in the afternoon, the market headed into negative territory on a rumor that Mr. Greenspan would not be reappointed when his current term expires in August.

White House spokesman Marlin Fitzwater denied the administration was considering replacing Mr. Greenspan with George Shultz, secretary of state under former President Ronald Reagan.

According to the rumor, health and age considerations weighted against Mr. Greenspan, although Mr. Shultz is older by five years.

Traders scoffed at the rumors, and a bond trader said he thought

Treasury Market Yields

Prev. Prev.

Tuesday Week Month

3-Month Bill 5.77 5.73 5.63

6-Month Bill 6.05 6.04 5.91

1-Year Bill 6.36 6.36 6.14

2-Year Note 6.95 6.97 6.80

3-Year Note 7.39 7.38 7.11

4-Year Note 7.58 7.57 7.32

5-Year Note 7.94 7.94 7.70

7-Year Note 8.18 8.16 7.92

10-Year Note 8.31 8.27 8.04

20-Year Bond 8.51 8.47 8.24

30-Year Bond 8.51 8.47 8.24

Source: Cantor, Fitzgerald/Telerate

the price declines at the long end really reflected Japanese selling of the principal portion of Treasury zero coupons.

Dealers who bought back the principal portion then reconstituted the original securities and sold them, he said.

Japanese accounts reportedly bought billions of dollars of the principal portions earlier in the year. The trader estimated only several hundred million dollars were involved yesterday, but said if such selling continued, "it would be devastating to the market."

Although May housing starts were close to waht traders expected, most of the improvement showed up as a revision to April's number.

May starts rose only 0.1%, to a 982,000 annual rate, while the April starts were revised up to an 8.2% gain, to 981,000. Last month, April's change was reported as a 6.2% gain, to a 957,000 pace.

Meanwhile, May permits jumped 7.2% to a 979,000 annual rate, and April permits were revised up to a 2.4% increase, after being reported last month as a 3% decline.

Marylin Schaja, a money market economist at Donaldson, Lufkin & Jenrette Securities Corp., said the housing report confirms the housing industry is "stabilizing, albeit slowly," after hitting bottom in January.

The strength in permits shows the gains in housing will continue, she said.

The September bond future contract closed 7/32 lower at 92 19/32.

In the cash market, the 30-year 8 1/8% bond was 7/32 lower, at 95 22/32-95 26/32, to yild 8.51%.

The 8% 10-year note fell 3/22, to 97 25/3297 29/32, to yield 8.31%.

The three-year 7% note was unchanged, at 98 29/32-98 31/32, to yield 7.39%.

Rates on Treasury bills were mixed, with the three-month bill up one basis point at 5.62%, the six-month bill one basis point higher at 5.80%, and the year bill one basis point lower at 6%.

Agency Spreads Narrow

The Home Loan Bank Board priced $690 million of debentures yesterday, the traders said the debentures' narrow spreads to Treasuries were typical of the situation in the agency market right now.

The issue consisted of $350 million of two-year notes that were priced 10 basis points above the comparable Treasury, and $340 million of three-year notes that were priced 12 basis points above the Treasury three-year.

An agency trader compared the spreads to those six months ago, when a two-year Home Loan issue would have been priced about 15 basis points above Treasuries and a three-year issue would have come about 20 points over Treasuries.

The spreads have narrowed because there is less agency supply. The Home Loan Bank Board's issuance has fallen sharply. The agency, which raises funds for the thrift industry, has been paying down debt all this year; yesterday's $690 million issue replaced $2.3 billion of maturing debt.

"The paydowns have been so enormous on a monthly basis, the lack of supply has forced the spreads tighter and tighter," said Ward McCarthy, a managing director of Stone & McCarthy Research Associates.

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