Treasury note and bond prices ended 1/4 to 1/2 point lower yesterday after the Federal Reserve failed to signal the easing in monetary policy many participants had expected.

The 30-year bond closed 1/2 point lower, where it yielded 7.80%, and short-term notes were down 1/4 to 3/8 point.

Prices declined at midday after the Fed refrained from intervening in the market yesterday at its usual time, then moved lower during the afternoon.

Many participants still expect a Fed easing, but traders said the Fed's inaction yesterday had started to worry a lot of investors who acquired long positions in anticipation of a Fed move.

Meanwhile, the Street's inventory is getting larger thanks to the Treasury's note auctions, which began with yesterday's sale of $14.75 billion of two-years and will conclude with today's $10.25 billion of five-years.

"I think people are a little caught from the long side," the head of a government trading desk said. "If the Fed's not easing, the market's still expensive, it has another 10 or 15 basis points to go down."

A bond trader was also pessimistic.

"The technicals are not that healthy," the trader said. "Everyone's long, everyone's bullish, everyone's waiting for the imminent Fed ease."

If the market doesn't get an easing from the Fed, accounts with long positions are likely to sell, he added.

Prices had rallied Tuesday when the 17% decrease in April housing starts increased expectations of a near-term Fed easing. The desk head noted that yesterday's sell-off had erased all of Tuesday's gains.

Traders said the sell-off at midday occurred as participants rushed to prepare for the two-year auction once it was clear the Fed was not going to ease.

At first glance, the auction results looked all right, but not outstanding.

The $14.76 billion of two-year notes were auctioned at an average yield of 5.13% and will bear a 5-1/8% coupon. The average matched traders' expectations, as did a chunk of securities awarded at 5.14%.

Analysts said the details also looked reasonable. Bids totaled $37.329 billion, or about 2-1/2 bids for every security being sold, which was slightly below average, and the $1.059 billion of noncompetitive bids was average for a two-year sale.

But after the results were announced, the price of the new notes fell, and late yesterday the two-years were yielding 5.18% in when-issued trading, up from the 5.13% auction average. The desk head said the notes came under pressure after the yield broke above 5.14%, the highest yield at which bids were awarded at the auction.

Even though the Fed did not ease yesterday, some analysts say it is possible a move could occur any day.

"It could happen almost any time if they want to do it," said William Griggs, a managing director at Griggs & Santow Inc.

Treasury Market Yields

Prev. Prev.

Wednesday Week Month

3-Month Bill 3.65 3.66 3.75

6-Month Bill 3.79 3.80 3.96

1-Year Bill 4.06 4.07 4.29

2-Year Note 5.06 5.12 5.36

3-Year Note 5.66 5.71 5.91

4-Year Note 6.53 6.59 6.84

5-Year Note 6.54 6.61 6.86

7-Year Note 6.91 6.98 7.21

10-Year Note 7.25 7.32 7.55

15-Year Bond 7.54 7.59 7.81

30-Year Bond 7.80 7.84 8.03

Source: Cantor, Fitzgerald/Telerate

But Stephen Gallagher, an economist at Kidder Peabody & Co., said the next likely opportunity for a Fed easing move will not occur until after the May employment report is released on June 5.

The bigger-than-expected increase in the March merchandise trade deficit announced yesterday morning had little impact on Treasury prices.

The March trade gap jumped 76.9% to $5.82 billion from the revised $3.29 billion February deficit. The consensus forecast was for a smaller increase, to $4.6 billion.

Exports fell 1.8%, to $36.98 billion, led by a decline in capital goods, and imports increased 4.5%, to $42.79 billion.

Traders said the bond market will probably ignore today's indicators too. Economists on average expect new jobless claims to slide 6,000 to 418,000 in the week ended May 9 and forecast a $19.4 billion budget surplus for April, down from the government's $30 billion surplus last April.

The June bond futures contract closed 7/16 lower at 101-4/32.

In the cash market, the 30-year 8% bond was 15/32 lower, at 102-4/32-102-8/32, to yield 7.80%.

The 7-1/2% 10-year note fell 13/32, to 101-20/32-101-24/32, to yield 7.25%.

The three-year 5-7/8% note was down 9/32, at 100-16/32-100-18/32, to yield 5.66%.

In when-issued trading, the five-year note to be sold today was bid at 6.59%, up from 6.49% late Tuesday.

Rates on Treasury bills were higher, with the three-month bill six basis points higher at 3.59%, the six-month bill up seven basis points at 3.69%, and the year bill nine basis points higher at 3.91%.

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