Treasury prices retreated yesterday as investors discouraged about the chances for a near-term Fed easing decided to sell securities.

Traders said the stock market's stability and the approach of today's seven-year auction also contributed to the price declines.

By late in the afternoon, the 30-year bond had fallen 3/4 point and yielded 7.40%.

"There were some people who probably expected the Fed might show them a little more accommodation here and it didn't happen," said James Kenney, head of Treasury trading at Prudential Securities. "I think others thought there might be further weakness in the stock market and that didn't develop."

On Monday, Treasury prices spiked higher in the morning when the Dow Jones industrial average dropped more than 100 points. Yesterday, the Dow closed almost unchanged.

Kenney said that on the economic front, this week's only important news, late-September auto sales, had been "fairly robust," while the political background was unfavorable to the bond market since it looks increasingly likely that Democratic presidential candidate Bill Clinton will be elected.

"You add it all together and you come away with the feeling the market has fully priced in a further Fed ease and it's not getting it," he said.

Traders said leveraged accounts sold large amounts of two- and five-year notes yesterday morning. A note trader said the accounts were reportedly selling paper they had been holding for quite some time. The trader added that it made sense to begin to take profits because the market had already priced in a Fed ease.

Traders said part of the selling yesterday came from participants who had bought securities during Monday morning's brief rally on the stock market's weakness. The price declines also reflected dealers' efforts to set up for today's seven-year auction and to hedge of corporate issuance, they said.

The Fed signaled it had not changed policy yesterday by adding reserves with customer repurchase agreements, a purely technical move.

When the Fed did not ease after the employment report Friday, traders pinned their hopes on getting a move after yesterday's Federal Open Market Committee meeting.

Many traders still expect the Fed to cut the discount and funds rate today.

But some participants argued that the Fed is unlikely to cut rates today because the Yom Kippur holiday means the market will be thinly staffed. If the Fed were going to move, it should have done so after yesterday's meeting ended, according to this argument.

Doug Schindewolf, an economist at Smith Barney Harris Upham & Co., said most participants still expect a Fed easing today.

Schindewolf does not agree. When the Fed failed to react to Friday's weak September employment report, "I concluded they felt no urgency to cut rates and there were other overriding concerns," such as worries about the dollar's weakness, he said.

Schindewolf added that all the financial markets have been jittery, and Fed policymakers "traditionally avoid periods of market volatility in terms of initiating a policy move."

Traders said the market could be hit hard today if the Fed fails to ease. But Schindewolf pointed out that the stock market would also suffer, and its weakness could lend a bid to the short end of the Treasury market.

The $9.75 billion of seven-year notes to be auctioned this afternoon also weighed on the bond market yesterday, and traders were divided on the prospects for the sale.

Traditionally there is little customer interest in the seven-years, but some traders think the notes will be popular with arbitrate players because they are cheap compared to other issues around them, like the five- and 10-year notes.

Bur a coupon trader argued that even though the spreads between seven-years and other issues are attractive, the arbitrage buying would not be sufficient to underwrite the issue.

And a bond trader said that betting on the spread between seven- and 10-year notes would be tricky given the current cost of financing the 10-years, which have been on special for weeks.

"It's not so much that sevens are cheap as that 10s are rich, but you can't finance them, they're not around," the bond trader said.

Late yesterday, the seven-year notes were yielding 5.86% in when-issued trading. Traders said that absent any big move in prices this morning, the issue should be sold closer to 5.90%.

The December bond futures contract close 27/32 lower at 104 29/32.

In the cash market, the 7 1/4% 30-year bond was 23/32 lower, at 98 1/32-98 5/32, to yield 7.40%.

The 6 3/8% 10-year note fell 14/32, to 100 18/32-100 22/32, to yield 6/27%.

The three-year 4 5/8% note was down 6/32, at 101 5/32-101 7/32, to yield 4.16%.

Rates on Treasury bills were higher, with the three-month bill up seven basis points at 2.74%, the six-month bill up seven basis points at 2.85%, and the year bill five basis points higher at 2.94%.

Treasury Market Yields

Prev. Prev.

Tuesday Week Month

3-Month Bill 2.77 2.77 2.95

6-Month Bill 2.91 2.93 3.00

1-Year Bill 3.02 3.04 3.11

2-Year Note 3.71 3.80 3.78

3-Year Note 4.16 4.27 4.25

5-Year Note 5.23 5.32 5.18

7-Year Note 5.83 5.88 5.74

10-Year Note 6.27 6.36 6.28

30-Year Bond 7.40 7.36 7.21

Source: Cantor, Fitzgerald/Telerate

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