Treasury prices ended lower yesterday after the market's initial gains were wiped out by a surge in commodity prices.

In overseas activity, long-term Treasury securities continued to rise on follow-through buying in response to the weak June employment report released Friday.

The buying pushed the yield on the 30-year Treasury bond down to 6.62%, the lowest intraday yield since the government began issuing 30-year debt regularly in 1977. The previous low was the 6.65% yield seen March 8 and again last week.

But during the New York session, the bond market suffered. when big increases in metal and grain prices reawakened inflationary fears.

By yesterday's close, the long bond was off 1/4 point on the day and yielded 6.67%.

"We started out the day quite positively, but it seemed as if there was a steady weakening in demand as the day progressed," said Steven Slifer, a money market economist at Lehman Brothers. "Quite clearly, the [Commodity Research Bureau index] played a heavy role in all of that."

The CRB index, which tracks a variety of commodity futures prices, jumped 5.29 points, or 2.4%, to close at 217.30. That is its highest closing level in 20 months.

Grain prices were the biggest culprit in the increase, but precious metals, crude oil, and coffee contracts also posted gains. Spot gold was quoted at $392 an ounce late yesterday, up $6.60 from Friday's close.

Economists said the increases in commodity prices were unnerving for the bond market, which is constantly on guard against inflation. But they argued that the price gains would not have a long-term impact on U.S. inflation rates.

Grain prices have risen as the heavy rain in the Midwest damaged crops or kept farmers from planting. "That does push up the CRB in the short term and it will probably have an impact on the producer and consumer price indexes in the short term," Slifer said. "But we've seen what happens when new crops arrive: prices go right back down."

Slifer said gold has risen as speculators invested in the metal in anticipation of demand from China, where individuals have few other ways to hedge against inflation, and he said it was a "quantum leap" to link that situation with higher inflation in the U.S.

Traders said that a few other factors kicked in late in the day to push prices lower, including stronger-than-expected car sales and department store sales and speculation about a possible tightening by the Federal Reserve.

Late-June car sales came in at a 7.7 million annual pace, well above the consensus forecast for a 6.9 million sales rate. And according to the Johnson Redbook report, department store sales for the first week of July posted a healthly 1.1% gain from the same period in June.

Traders said there were also rumors circulating late yesterday that Johnson Smick International, a consulting firm in Washington, D.C., had issued a report that the Federal Reserve would tighten monetary policy immediately. A spokesman said the firm does not comment on the contents of its reports.

The talk about a possible tightening accounted for the fact that short-term prices underperformed the long end, traders said. The speculation occurred as the Federal Open Market Committee began a two-day meeting.

Friday's report of a scant 13,000 increase in June employment had convinced most participants the Federal Reserve would keep monetary policy steady over the near term, with the funds rate targeted at 3%.

Some economists were even discussing the possibility that Fed policymakers would vote to shift back to a neutral stance at this week's meeting. According to press reports, the FOMC adopted a policy directive that was titled toward tightening at its May 18 meeting.

Yesterday's losses occurred on relatively thin volume and some traders said it was not surprising that Treasury prices had undergone a correction, given the rally the market has enjoyed in recent weeks.

"The overbought indices are very high, suggesting we were due for a sell-off," a government bond trader said.

The September bond futures contract closed 14/32 lower, at 113 28/32. Earlier in the session, the contract had made a new hip at 114 25/32, surpassing the previous high of 114 12/32.

In the cash market. the 7 1/8% 30-year bond was 7/32 lower, at 105 22/32-105 24/32, to yield 6.67%.

The 6 1/4% 10-year note fell 9/32, to 103 12/32-103 14/32, to yield 6.67%.

The three-year 4 1/4% note was down 10/32, at 99 24/32-99 26/32, to yield 4.31%.

Rates on Treasury bills were higher, with the three-month bill up three basis points at 2.98%, the six-month bill up seven basis points at 3.13%, and the year bill I 0 basis points higher at 3.31%. Treasury Market Yields Prov. Prov. Tuesday Week Month3-Month Bill 3.02 3.08 3.186-Month Bill 3.20 3.20 3.391-Year Bill 3.42 3.43 3.642-Year Note 3.99 3.99 4.303-Year Note 4.31 4.31 4.655-Year Note 5.03 5.03 5.337-Year Note 5.42 5.39 5.7310-Year Note 5.77 5.76 6.0830-Year Bond 6.67 6.66 6.91Source: Cantor, Fitzgerald/Telerate

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