Treasury note and bond prices dipped late yesterday afternoon when the White House said it had sharply increased its estimate for next year's budget deficit.

The losses were not great; the 30-year bond ended only 1/8 point lower, where it yielded 8.44%.

The White House is now estimating a $348.3 billion deficit in fiscal year 1992, a big jump from its previous estimate of $280.8 billion.

Traders said the increase in the estimated deficit was an unpleasant surprise. The higher the government's budget gap, the more Treasury securities will have to be issued to finance the deficit.

The White House lowered its estimate for the deficit for the current fiscal year to $282.2 billion from an earlier estimate of $318.1 billion.

Steven Ricchiuto, economist at Barclay de Zoete Wedd Government Securities, said it was not surprising that investors and traders stayed on the sidelines ahead of today's semi-annual Humphrey-Hawkins testimony by Federal Reserve Chairman Alan Greenspan.

"That's really going to set the tone for the entire remainder of the week," Mr. Ricchiuto said.

Mr. Ricchiuto said traders would listen to see whether the Fed chairman emphasizes the recovery that has occurred so far in the economy or the problems that remain, such as the slow growth of the money supply and the continuing credit crunch.

Newspapers have already reported that the Fed governors voted to keep the targets for money growth unchanged for the coming year.

Earlier yesterday, the market paid little attention to some stronger-than-expected economic news.

Prices moved lower briefly yesterday morning after the June industrial production report showed a 0.7% gain, when the market had been expecting only a 0.5% rise.

The market then bounced back, only to dip again in mid-afternoon on stronger-than-expected car sales figures, especially General Motors' report that its sales rose in the first 10 days of the month.

Leb by GM's strength, sales for early July came in at a 7.4 million annual rate, matching the brisk pace in the last 10 days of June.

Yesterday's economic numbers as a whole showed much more strength than Friday's reports, including the 0.2% decline in June retail sales and the 0.3% drop in June producer prices.

Not only did industrial output rise 0.7% in June, but both April and May's gains were revised higher.

May is now listed as a 7.0% increase, up from the 0.5% rise reported last month, and April was revised to a 0.5% increase from the 0.3% gain originally reported.

The increase in output caused a 0.3-point rise in the capacity utilization rate. Together with revisions to previous months' numbers, the rate now stands at 79.3%.

Marilyn Schaja, a money market economist at Donaldson, Lufkin & Jenrette Securities Corp., said the report showed broad-based gains in manufacturing.

"The data support the view that we are in a recovery," Ms. Schaja said.

An increase in auto production had been expected, bu Matthew Alexy, a money market economist at Deutsche Bank Government Securities, pointed out that even excluding autos, production was up 0.6%.

Treasury Market Yields

Prev. Prev.

Monday Week Month

3-Month Bill 5.73 5.73 5.75

6-Month Bill 5.94 5.89 6.07

1-Year Bill 6.26 6.31 6.37

2-Year Note 6.87 6.94 6.97

3-Year Note 7.29 7.37 7.39

4-Year Note 7.44 7.57 7.58

5-Year Note 7.90 7.97 7.94

7-Year Note 8.13 8.20 8.17

10-Year Note 8.26 8.31 8.29

20-Year Bond 8.43 8.48 8.49

30-Year Bond 8.44 8.49 8.49

Source: Cantor, Fitzgerald/Telerate

But he said the gain in production was old news for the market, repeating the message conveyed by the increase in hours in the June employment report.

"It tells us there's been a pickup in production activity," Mr. Alexy said. "The question is how sustainable it will be."

Also yesterday, the Commerce Department reported that manufacturers cut their inventories by 0.5% in May, while May sales rose 1.0%.

The September bond future contract closed unchanged at 93-26/32.

In the cash market, the 30-year 8 1/8% bond was 5/32 lower, at 96 11/32-96 15/32. to yield 8.44%.

The 8% 10-year note fell 3/32, to 98 4/32-98 8/32, to yield 8.26%.

The three-year 7% note was unchanged, at 99 6/32-99 8/32, to yield 7.29%.

Rates on Treasury bills were higher, with the three-month bill up one basis point at 5.58%, the six-month bill up wo basis points at 5.70%, and the year bill three basis points higher at 5.91%.

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