Treasury prices improved for the second session in a row yesterday, aided by the Federal Reserve's massive purchase of coupon securities. purchase of coupon securities.

The rally brought the 30-year bond yield down to 7.50%, its lowest close in more than a month. The long bond gained 3/8 point, while note prices were up 1/8 to 3/8 point.

The Fed's purchase was widely anticipated, although analysts had disagreed about the exact timing. The central bank usually makes two permanent purchases for its own account in November to add reserves ahead of the holiday season. Such a purchase is known as a "coupon pass" on the Street.

Traders estimated the Fed had bought $4 billion and said the Fed was most interested in securities maturing in seven years or more.

But Steve Slifer, a money market economist at Lehman Brothers, said he thought yesterday's gains had more to do with a slight shift in the market's mood than with the Fed's buying spree.

"I don't know that it's something that's going to last forever, but we've been on this fairly steady uptrend" in recent days, he said.

"I don't know that there is any great economic justification behind it, but people feel the short end has gone about as far as it can go, because the Fed is on hold here for the foreseeable future," Slifer continued. "So they're trying to take advantage of the higher yields out the curve, and we've seen this impressive flattening."

Traders agreed that retail investors were interested in extending the maturity of their holdings.

"A couple of accounts we've talked to recently are looking to buy out the curve because they think it will flatten more," a bond trader said. "And the Fed's purchase won't do anything to dampen their enthusiasm."

The trader expects the long end to improve more, but noted that the December bond futures contract faces major resistance at 104 8/32-104 11/32, right above last night's close at 104 3/32. That level corresponds to the 7.50% yield on the cash bond, he said.

Despite all the talk about investors moving out the curve, the yield curve reversed some of its recent flattening as the market rallied yesterday, with the 30-year bond's spread to the two-year note widening to 298 basis points from 293 late Tuesday.

Traders said the curve had steepened because some participants decided to take profits on their flattening trades. Despite yesterday's small setback, the trend to a flatter curve is still in place, they said.

"Guys put these [flattening trades] on during the auctions and they were home runs," a note trader said. "You've seen people ringing the register."

Treasury prices briefly moved lower yesterday morning after the Commerce Department reported that the September trade deficit narrowed to $8.3 billion from the revised $8.95 billion August gap. That was a little better than the $8.8 billion deficit economists had expected.

But analysts said the report's composition could be interpreted as unfriendly for the bond market. Exports jumped 6.8%, suggesting that demand for U.S. products is holding up even though the economies of some of the nation's major trading partners are slowing, and imports increased 4%, a sign of life in the domestic economy.

Even though the trade gap improved a little in September, economists said they expect the deficit will continue to deteriorate.

For the first nine months of the year, the trade deficit totaled $60.1 billion, up from the $49.2 billion gap at the same time last year.

The Treasury surprised the market by keeping the two- and five-year issues unchanged, instead of increasing the sizes as economists had predicted. The Treasury will sell $15 billion of two-years Monday and $10.75 billion of five-years Tuesday. The two auctions will raise $12.425 billion of new cash.

The December bond futures contract closed 14/32 higher at 104 3/32.

In the cash market, the 7 5/8% 30-year bond was 13/32 higher, at 101 11/32-101 15/32, to yield 7.50%.

The 6 3/8% 10-year note rose 15/32, to 97 5/32-97 9/32, to yield 6.75%.

The three-year 5 1/8% note was up 5/32, at 100 2/32-100 4/32, to yield 5.07%.

In when-issued trading, the two-year note was offered at 4.60% and the five-year note was bid at 6.01%.

Rates on Treasury bills were lower, with the three-month bill off two basis points at 3.14%, the six-month bill down three basis points at 3.35%, and the year bill nine basis points lower at 3.52%.

Treasury Market Yields

Prev. Prev.

Wednesday Week Month

3-Month Bill 3.18 N.A. 2.96

6-Month Bill 3.43 N.A. 3.23

1-Year Bill 3.64 N.A. 3.42

2-Year Note 4.52 4.43 4.12

3-Year Note 5.07 5.05 4.73

5-Year Note 5.94 5.94 5.74

7-Year Note 6.37 6.42 6.29

10-Year Note 6.75 6.84 6.73

30-Year Bond 7.50 7.65 7.60

Source: Cantor, Fitzgerald/Telerate

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