The market continued to range trade yesterday in a cautious approach to the inflation and retail sales reports this week.

The 30-year bond closed yesterday's session up 3/32 at 104 19/32, to yield 5.91%.

Activity was generally light and was dominated by traders' positioning ahead of this week's round of economic reports, the most of important of which are the inflation releases.

In what has become a recurring theme in the market, Treasury prices traded higher in the morning as day-traders tested the market's upside potential, but prices retreated through the afternoon as the buying dried up. The market ended the session little changed.

The futures market also turned in a volatile performance yesterday. The December bond contract held near a key support level at 120.16 for much of the day, but a failed attempt to break through resistance at 120.25 and a consequent dip through support levels ignited a sharp sell-off. Bargain hunters emerged late in the session and helped prices return to opening levels.

Late in the day, dealers in the cash market placed bets on this week's round of economic reports, Most expect the producer price index for September to show that inflation remains under wraps.

Wall Street economists polled by The Bond Buyer expect an increase of 0.2% for the PPI. A reading of 0.2% would support the basic message of limited price pressures in the economy, which is likely to keep the market on a bullish track, analysts said.

The retail sales report for September is expected to show a solid gain, led by modest increases in car sales and renewed strength in department stores, chains, and discounters, Analysts polled by The Bond Buyer generally expect a gain of 0.5%.

"The market doesn't think the economic reports this week will be a problem, and the market is telling you that by the way it traded," said James Kenney, head trader at Prudential Securities Inc.

Kenney said trading yesterday focused on the longer maturities. A flow of money into the long end of the Treasury market nudged the priced of long bond higher, while municipal defeasance helped the intermediate sector post gains as well.

Bright prospects for inflation continued to underpin the long end of the market as investors have gained more confidence in recent sessions to own fixed-income securities. Longer-dated issues performed well yesterday at the expense of the short end as funds continued to move money out on the yield curve.

The short end held its ground but generally underperformed other areas of the curve. Traders said that with expectations for steady monetary policy, investors believe other areas of the market will offer a higher rate of return.

The middle of the yield curve continued to receive solid sponsorship from state and local governments as they invested money in Treasuries as part of the municipal defeasance programs.

Matthew Alexy, government trading strategist at CS First Boston, said the market will draw on the inflation reports for direction. Alexy said that while the employment report for September displayed enough weakness to support Treasuries, investors need further proof that economic fundamentals support the market before yields can move any lower.

Alexy said that participants need only to think back to how the market reacted to last month's inflation data, when the consumer price index came in higher than expected and the market sold off violently.

On the economic data front, the Atlanta Federal Reserve's index of regional activity rose to 14.6% in September from a revised 3.7% in August, which is slightly stronger than expected. The employment index rose to 2.5% from -3.6%, while production fell to 7.6% from 12.4%.

In other regional activity, Mellon Bank's coincident index of economic activity for the Pittsburgh region -- which gauges civilian employment, industrial power sales, wages and salaries, and retail sales -- fell 0.1% in July, after a revised gain of 0.3% in June, Mellon said.

In testimony before the House Banking Committee, Federal Reserve Chairman Alan Greenspan rejected legislation offered by House and Senate members to reform the central bank and make it more accountable to the public. Greenspan said that the legislation would undermine the independence of the Fed and make monetary policy subject to political pressures.

Despite a slight rebound in the wake of last week's three-point plunge, Americans' overall confidence levels and their expectations for the national economy remained weak, according to the latest Money Magazine/ABC News Poll. The consumer comfort index was at minus 38 in the latest week.

In futures, the September contract ended down 6/32 to 120.12.

In the cash markets, the 3 7/8% two-year note was quoted late yesterday down 1/32 at 100.03-100.04 to yield 3.80%; the 4 3/4% five-year note ended up 1/32 at 100.13-100.17 to yield 4.62%; the 5 3/4% 10-year note was down 4/32 at 103.16-103.20 to yield 5.27%; and the 6 1/4% 30-year bond was unchanged at 104.16-104.18 to yield 5.91%.Treasury Market Yields Prev. Prev. Wednesday Week Month3-Month Bill 3.03 2.98 3.016-Month Bill 3.11 3.10 3.141-Year Bill 3.22 3.22 3.332-Year Note 3.80 3.82 3.843-Year Note 4.06 4.09 4.125-Year Note 4.63 4.68 4.707-Year Note 4.81 4.87 4.9210-Year Note 5.26 5.31 5.3530-Year Bond 5.91 6.00 5.97Source:Cantor, Fitzgerald/Telerate

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