The market continued to defy gravity yesterday as widespread demand for Treasuries helped prices post moderate gains.

The 30-year bond ended the session up 11/32, to yield 6.11%.

Note and bond prices rose on the day, due partly to economic reports showing that growth remains sluggish and an extension of the market's recent rally.

A strong rally in the futures market pushed the price of the September bond contract above 119.27 and was a contributing factor to gains in the cash market.

The bulk of the buying at the long end came from retail accounts looking to extend the duration of their portfolios against the backdrop of scarcity for bonds.

The Treasury is now auctioning bonds on a semiannual basis instead of quarterly. That lack of 30-year issues has led to panic-buying from investors who fear there will not be enough long bonds to go around.

The intermediate sector of the curve also turned in an impressive performance yesterday, benefiting from widespread buying interest.

The 10-year note led the chase higher as money poured in from the municipal and mortgage markets. State and local governments continue to invest in Treasuries as part of defeasance programs. Meanwhile, rapid prepayments of mortgages in the current low interest rate environment have left bond investors holding cash rather than bonds. That money is being invested in Treasuries, traders said.

At the front end of the curve, high hopes for a coupon pass this week and rumors of steady central bank buying supported short-dated paper. Traders speculated that the Federal Reserve was buying bills for the Bank of Japan.

"The market is seeing broad-based demand in all sectors," said Anthony Karydakis, senior financial economist at First Chicago Corp. "Anything in the five-year sector and beyond is poised for new highs."

Still, participants said that retail accounts remain the most consistent source of support for the market. Despite the low level of long-term rates and the market's vulnerability to bad news, portfolio managers hold that the risk-reward ratio is too attractive for them to stay out of the market.

"I don't see an awful lot of risk in the bond market," said Marshall Front, senior executive vice president at Stein, Roe & Farnham Investment Counselors Inc. in Chicago. He believes that positive fundamentals will continue to underpin the market and he expects activity in the economy and inflation to remain supportive to the market.

Despite Fed Chairman Alan Greenspan's warnings in July about inflation and higher short-term interest rates, players on the buy side of the market say that monetary policy is likely to become more accommodating in coming months as economic conditions fail to improve.

"If the inflation outlook remains benign it's likely that Fed policy will remain unchanged," Front said.

Jay Goldinger, chief investment counselor at Capital Insight Inc. in Los Angeles, said that the bond rally is likely to continue until economic fundamentals take a sharp turn for the better. He said that retail investors need to see compelling signs that the economy is improving before they throw in the towel. "The rally will continue until people stop making money," Goldinger said.

Retail investors pointed to economic data released yesterday as evidence that fundamentals remain constructive for the market, as reports supported the view that second quarter gross domestic product is likely to be revised downward.

Yesterday, the Commerce Department reported that sales of new single-family homes in July fell 5.0% to a seasonally adjusted annual rate of 629,000 on decreases in all regions of the country. New home sales in June were up a revised 3.3% to 662,000, less than the 11% increase originally reported.

Mickey Levy, chief economist at CRT Securities, said the report is particularly weak against the backdrop of the lowest interest rates in 20 years. "Housing has not responded as strongly as one might expect," he said, noting that weak consumer confidence continued to hurt the housing sector in July.

The Commerce Department also released its merchandise trade deficit report on a balance of payments basis. Surging imports pushed up the reading by 17.3% to $34.4 billion in the second quarter.

Michael Moran, chief economist at Daiwa Securities, said the report confirmed the deterioration already revealed in the trade figures for June. The report supports the view that second quarter GDP is likely to be revised lower, he said.

"The trade number showed that there was bad slippage in the second quarter," Moran said.

The market is also awaiting the release of economic indicators, which will let participants know whether the rally will continue or if a correction is warranted.

Of particular interest is today's GDP reading and Friday's employment report, which will provide the market with its first comprehensive view of the economy's performance in August.

Participants are also on the lookout for a permanent addition of reserves ahead of the Labor Day holiday. Economists are generally mixed on whether the Fed will purchase coupons or bills this week, but most believe that dealer positioning warrants an infusion of cash in the bill sector.

"The coupon market is overheated right now and the Fed will probably buy bills," said Mark Wanshel, vice president and financial economist at J.P. Morgan Securities.

Cheryl Katz, money market economist at Lehman Brothers, also expects a purchase of bills today or tomorrow. The transaction is likely to weigh in at about $7 billion, she said.

In futures, the September contract ended Up 7/32 to 119.17.

In the cash markets, the 3 7/8% two-year note was quoted late yesterday up 4/32 at 100.02-100.03 to yield 3.82%. The 4 3/4% five-year note ended up 9/32 at 99.26-99.28 to yield 4.77%. The 54% 10-year note was up 13/32 at 102.10-102.12 to yield 5.43%. And the 6 1/4% 30-year bond was up 11/32 at 101.27-101.29 to yield 6.11%.

The three-month Treasury bill was down one basis point at 3.03%, the six-month bill was down one basis point at 3.12%, and the year bill was down three basis points at 3.24%.Treasury Market Yields Prev. Prev. Monday Week Month3-Month Bill 3.07 3.04 3.116-Month Bill 3.19 3.19 3.291-Year Bill 3.34 3.40 3.552-Year Note 3.82 3.92 4.183-Year Note 4.15 4.29 4.475-Year Note 4.77 4.96 5.207-Year Note 5.03 5.22 5.4810-Year Note 5.43 5.60 5.8330-Year Bond 6.11 6.21 6.55Source: Cantor, Fitzgerald/Telerate

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