A choppy Treasury market ended the day on an upward note, thanks mainly to a better-than-expected Consumer Price Index report for August.

The market was also buoyed by short coverings, a comment from Federal Reserve governor Lawrence Lindsey that inflation is not getting out of hand, and softness in the Commodity Research Bureau's index, economists said.

Prices on the benchmark 30-year Treasury bond ended up 3/8 point to yield 7.67%.

The market got off on solid footing as the Commerce Department reported that the CPI rose only 0.3% in August, compared to economists' forecast of 0.4%. The core index, excluding food and energy, rose 0.3%, in line with expectations.

The numbers still do not paint a glowing portrait for inflation trends, economists said, but after being stung by last Friday's inflationary producer price index increase of 0.6% for August, market participants had feared the worst from yesterday's CPI.

"The bond market was prepared to be disappointed, but found instead a number in moderate territory," said Robert Brusca, senior vice president and chief economist at Nikko Securities Co. International Inc.

Brusca calls inflation fears "a tempest in a teapot," and says neither the PPI nor the CPI shows strong price pressures, noting that oil is putting pressure on prices but that core prices are not up. He also said that the service sector has been very steady, "so inflation trends in that sector are still pointing downward, and that's half of the report."

Still, fears of a wildly inflationary CPI were so prevalent ahead of yesterday's report that many players hedged their positions in anticipation of a severe downturn. When the CPI number proved to be fairly tame, it set off a significant round of short covering with the buying pushing Treasury prices up further.

Treasury Market Yields Previous Previous Tuesday Week Month3-Month Bill 4.68 n.a. 4.456-Month Bill 5.15 n.a. 5.081-Year Bill 5.65 n.a. 5.562-Year Note 6.35 n.a. 6.223-Year Note 6.64 n.a. 6.585-Year Note 7.06 n.a. 6.957-Year Note 7.25 n.a. 7.1110-Year Note 7.44 n.a. 7.2830-Year Bond 7.71 n.a. 7.49

Source: Cantor, Fitzgerald / Telerate

"The CPI number itself didn't mean a hell of a lot," said Bob Doherty, a government bond trader at Kidder, Peabody & Co. "A lot of people went into the number with shorts on Friday, and now you're seeing a short-covering rally."

After an initial upswing on the number, the market then immediately saw selling before prices got stuck in a range, Doherty said.

The market's retrenchment was so acute that after initial gains of as much as 1/2 point in the morning session, the advance was nearly erased entirely by early afternoon.

The mid-afternoon release of the Johnson Redbook numbers for the first two weeks of September "saved the market" after the rally slowed, according to Anthony Chan, chief economist at Banc One Investment Advisors.

The report, which showed retail sales posting a healthy 4.2% gain in the first two weeks of the month, initially spooked the market before the realization that the data was artificially inflated, Chan said.

Heavy discounting by one of the major retail chains in the Redbook survey "biased the numbers upward," he said, adding that the report "is not really indicative of stronger economic activity."

In fact, a trend toward deep discounting by large chains is emerging in the Johnson Redbook reports and "might suggest that the inflationary outlook is not as bad as people thought," Chan said.

The CRB index closed down 0.60 point, at 232.53.

The 10-year Treasury note was up over 1/4 to yield 7.40%. The seven-year and five-year notes were both up slightly to yield 7.22% and 7.02%, respectively.

The yield on the three-month bill was down four basis points to yield 4.69%. The yield on the six-month bill was down one basis point to 5.16%, and the yield on the one-year was down two basis points to 5.63%.

Corporate Bonds

Standard & Poor's Corp. and Moody's Investors Service yesterday reconsidered their ratings on Borden Inc. and RJR Nabisco Inc.

Standard & Poor's said its ratings on Borden's triple-B senior unsecured debt and A-2 commercial paper remain on CreditWatch with negative implications, where they were placed on Aug. 22.

Borden has about $2.3 billion of debt outstanding.

Separately, Standard & Poor's affirmed RJR's double-B-plus preferred stock rating and its triple-B-minus senior debt, double-B-plus subordinated debt, and A-3 commercial paper ratings.

About $16 billion of debt and preferred stock is outstanding at RJR.

"RJR Nabisco's planned investment in Borden would be a non-cash transaction, and thus would not affect its ratings," Standard & Poor's said.

The rating moves came one day after RJR agreed to acquire a minority interest in Borden as part of the planned acquisition of Borden by Kohlberg, Kravis, Roberts & Co. The leveraged buyout firm will exchange stock of RJR that it holds for Borden's 141 million shares of common stock in a merger transaction valued at about $2 billion.

Moody's is continuing to review for a possible downgrade Borden's Baa3 long-term debt rating and Prime-3 rating on commercial paper, according to a release from the rating agency.

Moody's downgraded Borden's long-term debt and commercial paper ratings on Aug. 30 and kept the ratings under review in order to evaluate the steps that Borden's management is taking to address the company's underperformance, the release said.

Following the announcement that Kohlberg Kravis intends to acquire Borden, Moody's said the "review will now also focus on the impact of this proposed transaction on Borden's operating performance and its financial flexibility."

The rating agency is also reviewing the ratings of RJR Nabisco Holdings Corp. and its subsidiaries for possible downgrade. "To the extent that this investment will not create a significant intermediate term call on the cash of RJR, and that RJR does not attempt to leverage the investment, it is likely that RJR's ratings would be confirmed," a Moody's release said.

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