The only excitement yesterday occurred at the short end, where the two-year note traded erratically, and other Treasury prices ended with small gains after marking time through a dull trading session.

Late in the day, the 30-year bond was up 1/8 point to yield 8.47%.

The two-year sector has been plagued with rumors of manipulation since late May, when there were reports that a small group of players had cornered most of notes auctioned that month and made it expensive for other participants to borrow the securities.

Later, the two-year note due in April 1993 became expensive to borrow, and yesterday the current two-year, the 7% notes due in June 1993, came in for some extra attention.

The price of the June two-years jumped higher yesterday morning on reports that someone was selling April notes and moving into June notes.

The threat of a short squeeze, in which it becomes prohibitively expensive to borrow a certain security, caused the June two-years to jump to 100 10/32, from Wednesday's close at 100 5/32, then retrace some of that gain.

Traders disagreed about how the situation will affect the two-year sector. One argued that worries about a short squeeze will scare retail investors away, make the sector less liquid, and result in a sloppy auction next week. The Treasury will sell $12.5 billion of two-year notes on Tuesday.

"You discourage retail from playing in the two-year sector, so they park their money elsewhere," the trader said.

Others argued that the rising price on the current two-year will encourage retail investors to roll forward into the when-issued two-year note.

And William Griggs, a managing director at Griggs & Santow Inc., pointed out that there is no problem for investors who want to buy the security. "The risk is getting short in it," he said.

Except for the flurry of activity in two-year notes, Treasury trading was very quiet.

Late in the day, prices improved a little when the Federal Reserve reported another week's worth of sluggish monetary aggregates.

A spokesman for the Federal Reserve Bank of New York reported at the weekly press briefing that the nation's M1 money supply fell $5.2 billion, to $856.7 billion in the week ended July 8; the broader M2 aggregate declined $6.9 billion, to $3.4 trillion; and M3 rose a modest $300 million, to $4.2 trillion, in the same period.

The market ignored the economic news released yesterday morning.

Analysts said the May merchandise trade balance was ancient history and the jobless claims report was in line with expectations.

The Labor Department said 395,000 new claims for unemployment insurance were filed in the week ended July 6, up from the 388,000 new claims filed in week of June 29.

And in the week of June 29, the numbers of workers receiving state benefits fell 44,000, to 3.363 million.

There were a number of special factors that could have affected the claims numbers for the week of July 6, including the Independence Day holiday and the fact that claims often rise in the first week of a calendar quarter.

Peter Greenbaum, an economist at Smith Barney Harris Upham & Co., said yesterday's increase in claims was deceptive.

"On a trend basis, the labor markets really are improving," he said.

"The four-week moving average is down again for the ninth week in a row," Mr. Greenbaum continued. "The trend is pretty powerful."

The May trade deficit widened slightly to $4.57 billion from a revised $4.51 billion in April, which was less of an increase than economists had expected. The April gap originally was reported as $4.78 billion.

Both imports and exports declined, with exports down 0.9%, to $35.5 billion and imports off 0.6%, to $39.9 billion.

Imports were weaker than they looked on the surface, since oil imports rose, Mr. Greenbaum said. Nonoil

Treasury Market Yields

Prev. Prev.

Thursday Week Month

3-Month Bill 5.75 5.71 5.71

6-Month Bill 5.97 5.93 5.98

1-Year Bill 6.25 6.23 6.29

2-Year Note 6.84 6.87 6.83

3-Year Note 7.29 7.31 7.31

4-Year Note 7.46 7.49 7.50

5-Year Note 7.91 7.92 7.88

7-Year Note 8.14 8.15 8.13

10-Year Note 8.27 8.27 8.27

20-Year Bond 8.47. 8.46 8.47

30-Year Bond 8.46 8.46 8.46

Source: Cantor, Fitzgerald/Telerate

imports were down 2.5%, with declines posted in all areas.

On the other hand, he argued that the decline in exports was just a minor correction after the 6% gain posted between February and April.

Other economists said the weakness in May exports could signal the start of a gradual decline, reflecting the sluggish economies in many of the nations that the United States trades with, including Canada, the United Kingdom, and the rest of Europe.

Weakness abroad combined with the economic pickup at home mean the monthly trade figures will deteriorate in coming months, said Lawrence Krohn, a senior economist at Lehman Brothers. "Probably the good news on the trade front is over," Mr. Krohn said.

The only news today will be the Philadelphia Fed's Business Outlook Survey in the morning and the Treasury's year-bill announcement in the afternoon.

Economist at Salomon Brothers said they expect the Philadelphia survey to improve for the third month in a row. Last month, the Philadelphia index came in at 15.3%.

The September bond future contract closed 1/32 lower at 93 10/32.

In the cash market, the 30-year 8 1/8% bond was 5/32 higher, at 96 2/32-96 6/32, to yield 8.47%.

The 8% 10-year note rose 1/8, to 98 1/32-98 5/32, to yield 8.27%.

The three-year 7% note was up 1/16, at 99 6/32-99 8/32, to yield 7.29%.

In when-issued trading, the two-year note to be auctioned Tuesday was bid at 6.94%, and the five-year notes to be sold Wednesday stood at 7.92%.

Rates on Treasury bills were mixed, with the three-month bill steady at 5.60%, the six-month bill one basis point lower at 5.73%, and the year bill three basis points lower at 5.91%.

Also, for the week ending Wednesday, the federal funds rate averaged 5.85%, up from 5.79% the previous week, according to the New York Fed.

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