Government bonds end little changed as investors await news.

Strong news on the U.S. economy sent government bond prices only marginally lower as investors controlled their urge to sell until Friday's employment report.

Treasuries lost some ground early Monday but ended little changed yesterday as late afternoon short covering erased losses tied to the weak U.S. dollar and strong economic news.

The 30-year bond ended unchanged to yield 7.38%, while the two-year note ended down 1/32 to yield 5.99%. Fixed income observers voiced surprise at the market's ability to weather a storm of strong statistics on the economy, including one that showed continued strength in the manufacturing sector. While some observers jumped on the market's performance as evidence of renewed bullishness, most said bond investors are more interested in seeing the July employment report before selling positions.

The National Association of Purchasing Management's index rose to 57.8 from 57.5 as the new orders, production, and employment components all rose.

Bond market players generally focused on the price component, which fell slightly from 73.5 to 73.1. Although the price component of the index dipped last month, it remained at a worrisome level in the context of continued expansion, analysts said.

Despite widespread signs of strength in the report at a time when market players are hoping for signs of slower growth, Treasuries stood their ground. The 30-year bond ended down just 5/32 to yield 7.41%.

"We didn't see a big reaction to the NAPM data because the employment report is of greater concern to the bond market," said Michael Neimira, economist at Mitsubishi Bank Ltd.

The jobs report will provide the market with its first comprehensive look at the economy's performance in July. After the employment sector's surprisingly strong reading in June, bond holders are anxious' to see if the economy is still creating jobs and fanning potential wage pressures.

Treasuries experienced considerable price volatility Monday as market players' interest alternated between activity in the global foreign exchange and economic statistics.

Prices fell in overseas trading in response to the breakdown in trade talks between the U.S. and Japan and the weak dollar that resulted. But the market pared most of its dollar-related losses as the New York trading session got underway.

The U.S. unit weakened to 98.55 yen Monday compared with 100.04 late Friday. Late yesterday, the dollar was changing hands at 99.39 yen.

The market gained through the afternoon on dealer-led short-covering and bullishness spurred by a lower-than-expected fourth quarter borrowing needs estimate from the Treasury Department.

The U.S. fourth quarter borrowing need, reported at between $45 billion and $50 billion was lower than the $75 billion to $80 billion range money market economists were looking for. One monetary economist said the lower estimate indicates improvement in the federal budget deficit.

The central issue for the market this week is whether upcoming economic reports will support the notion that the economy is not overheating. Dealers stocked up on short-term and intermediate-term Treasuries last week in anticipation that soft news on the economy will attract larger accounts to step up and buy Treasuries.

Optimistic that the bond market is on the verge of breaking out of its bearish state, retail accounts came off the sidelines Friday. Their optimism stemmed from the belief that key economic reports due this week will support the notion that growth is slowing and halt the relentless rise in interest rates.

Market players looking for a reason to rally found it in last week's second-quarter gross domestic product report. Treasury yields plummeted Friday as the GDP figures showed a 3.7% growth rate during the second quarter. While the report generally matched market expectations, it was disappointing to some who were predicting a sharper rise.

The news came as a relief to bond market players, particularly since much of the gain reflected inventory rebuilding, which could limit gains in coming months.

More importantly, a growing number of market analysts believe that the buildup in inventories could postpone the next tightening of monetary policy the market expected by mid-August. The notion reinvigorated the short end of the Treasury market and encouraged retail investors to stock up on short-term securities.

Now the question remains: Will the buying frenzy continue? Standing in the market's way are this week's offering of economic reports. Players are hopeful that Friday's July employment report will show that the economy lost steam last month, keeping the Federal Reserve in its holding pattern and attracting more retail investors back into the market.

Observers agree that key to extending the Friday's rally is renewed interest by retail accounts. "The market needs some real buying interest from larger accounts to sustain current levels," said Elias Bikhazi, money market economist at Deutsche Bank Securities Corp.

Should the reports support the slower growth Scenario being played out in the national economy, particularly the employment report, participants said that the bond market could extend recent gains. Still, many expect the Fed to raise the federal funds rate by 50 basis points by Aug. 16, a move that would be aimed at controlling inflation and supporting the fragile U.S. dollar.

Some market observers believe a tightening of policy would restore stability to Treasuries and give larger accounts more confidence to buy securities. Some observers believe that if the central bank raised short-term rates at the next FOMC meeting, it Would remove uncertainty from the bond market and reduce investors' inflation expectations. In fact, some believe leaving monetary policy unchanged could do more harm to the market than good. Economists polled by The Bond Buyer generally expect nonfarm payrolls to increase by 200,000 in July, with most seeing the civilian unemployment rate rising marginally to 6.1%.

In the futures market, the September bond contract ended down 6/32 at 104.19,

In the cash markets, the 6 1/8% two-year note was quoted late Monday down 1/32 at 100.07-100.08 to yield 5.99%. The 6 7/8% five-year note ended down 1/32 at 100.17-100.19 to yield 6.73%. The 7 1/4% 10-year note ended down 1/32 at 100.28-100.29 to yield 7.10%. The 6 1/4% 30-year bond ended unchanged at 86.11-86.15 to yield 7.38%.

The three-month Treasury bill ended unchanged at 4.36%. The six-month bill closed up two basis points at 4.86%. The year bill also ended up two basis points at 5.36%.

Corporate Securities

NationsBank Corp. issued $300 million of 10-year subordinated notes to yield 7.812%, or 69 basis points over the U.S. 10-year Treasury note, according to lead manager NationsBank Capital Markets Inc.

The noncallable notes were priced at 99.571, bear a 7.75% coupon, and were rated A3 by Moody's Investors' Service and A-minus by Standard & Poor's Corp.

In the secondary market for corporate securities Monday, spreads of investment grade issues generally widened by 1/8 of a point, while high yield, issues generalLy held steady, Treasury Market Yields Prev. Prev. Monday Week Month 3-Month Bill 4.36 4.46 4.286-Month Bill 4.86 4.94 4.811-Year Bill 5.36 5.52 5.482-Year Note 5.99 6.10 6.153-Year Note 6.26 6.40 6.465-Year Note 6.73 6.87 6.937-Year Note 6.89 7.03 6.9710-Year Note 7.10 7.23 7.3130-Year Bond 7.38 7.51 7.60 Source: Cantor, Fitzgerald/Telerate

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