Treasuries drifted aimlessly yesterday as investors bided time ahead of today's release of the July employment report. Prices generally ended lower, led by the 30-year bond, which closed down 1/8 of a point, to yield 7.40%.

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, bondholders are anxious to see if the economy is still creating jobs and fanning potential wage pressures. Against that backdrop, activity in the Treasury market yesterday was dominated by accounts setting up for the employment figures. Dealers and retail accounts closed out some existing positions and established new ones in anticipation of a market-moving number this morning.

"The employment report will set the tone for the bond market in coming sessions," said Donald Fine, chief market analyst at Chase Securities Inc. "With people wondering when the Fed will tighten next, the jobs numbers are crucial."

Despite the declines, government bonds generally held their ground yesterday as players controlled their urge to sell paper into the report. Dealers said they were impressed by the market's ability to maintain current ranges, noting that larger retail accounts had been fairly active buyers throughout the session.

The bond market managed to weather news of a 10,000 drop in initial unemployment claims to 319,000 for the week ended July 30. But evidencing investors' preoccupation with today's July jobs numbers, prices lost ground only briefly before returning to opening levels.

Treasuries also shrugged off a New York Times article depicting Federal Reserve officials as uncertain about when to tighten monetary policy. Bond traders, particularly in overseas activity, initially reacted negatively because the officials interviewed for the article viewed the recent inventories buildup in the second quarter as a sign of business confidence. But prices rebounded when traders arrived at the view that indecision among Fed officials would keep any changes in monetary policy on hold for the time being.

While some observers jumped on the market's performance Thursday as evidence of renewed bullishness, most said bond investors are more interested in seeing the July employment report before selling positions.

There remains a wide range of opinions on what the employment figures will mean for the fixed-income markets. The central issue is whether the report will support the notion that the economy is not overheating. Dealers stocked up on short-term and intermediate-term Treasuries this week and last in anticipation that soft news on the economy will encourage larger accounts to step up and buy Treasuries.

But the jobs report is also the most formidable challenge standing in the market's way of extending the recent rally. Many players hope the 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.

Marilyn Schaja, money market economist at Donaldson, Lufkin & Jenrette Securities Corp., expects nonfarm payroll employment to increase by 150,000, which would suggest "a marked slowdown from the pace of the last few months."

The magnitude of the slowdown reflects also a deceleration in employment growth across a broad spectrum of industries, Schaja said.

"We do not think that the increases in employment reported in recent months cab be sustained," she said.

Should the report support the slower growth scenario being played out in the national economy, participants said that the bond market could extend recent gains.

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%. That would mark a slower rate of growth that the June report, which posted a hefty 379,000 nonfarm payroll gain.

While market players fear a potentially damaging report, they also worry the figures may not paint a clear enough picture of the U.S. economy.

For instance, said Chase's Fine, an increase of 200,000 non-farm payroll jobs would support the status quo and deprive the market of much-needed evidence about the economy's direction. On the other hand, an increase of 100,000 -- evidence of a slower economy -- or a gain of 300,000 -- evidence of a strengthening economy -- would provide investors with a better read of fundamentals.

"I'd rather see increases of below 100,000 or above 300,000 because they will give the market and the Fed something to go on and possibly knock us out of the recent range," Fine said.

In the futures market, the September bond contract ended up 1/32 at 104.22.

In the cash markets, the 6 1/8% two-year note was quoted late yesterday down 2/32 at 100.09-100.10 to yield 5.95%. The 6 7/8% five-year note ended down 5/32 at 100.18-100.20 to yield 6.72%. The 7 1/4% 10-year note ended down 7/32 at 100.28-100..00 to yield 7.10%. The 6 1/4% 30-year bond ended down 8/32 at 86.06-86.10 to yield 7.40%.

The three-month Treasury bill ended up two basis points at 4.42%. The six-month bill ended up two basis points at 4.88%. The year bill also ended up two basis points at 5.33%. Treasury Market' Yields Prev. Prev. Thursday Week Month3-Month Bill 4.42 4.51 4.346-Month Bill 4.88 5.02 4.881-Year Bill 5.33 5.52 5.422-Year Note 5.95 6.19 6.063-Year Note 6.23 6.45 6.385-Year Note 6.72 6.92 6.887-Year Note 6.88 7.08 7.1110-Year Note 7.10 7.27 7.2830-Year Bond 7.40 7.54 7.59 Source: Cantor, Fitzgerald/Telerate

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