Treasury note and bond prices drifted a little lower yesterday in quiet trading as the market waited for the Federal Reserve to lower short-term rates again.

Late in the day, the 30-year bond was off 1/8 point to yield 7.79%.

"Everyone's just waiting around to see whether the Fed's going to ease policy or not," said William Griggs, a managing director at Griggs & Santow Inc.

Even though the Fed did not signal a change in policy yesterday, participants are still sure that another easing is on the way.

Many analysts say the Fed may wait to see Friday's September retail sales and producer price reports, then move if those numbers are in line with expectations.

Mr. Griggs is looking for a 0.3% increase in producer prices and a 0.6% gain in last month's retail sales, and said those numbers would allow the Fed to ease.

He added that the retail sales number was the more important of the two, since "the real uncertainty at this stage is all about the economy."

Between now and Friday, the only excitement will be tomorrow's auction of $9.25 billion of seven-year Treasury notes.

A note trader argued that the activity yesterday in the when-issued sevens was the best news of the session.

There has been "substantial interest" in the notes, suggesting the auction will go well, he said.

Traders said they were keeping an eye on the dollar, which lost more ground againt the yen yesterday, and on gold and oil prices, which both went higher.

"These kinds of developments are bad for inflation," said Daniel Seto, an economist at Nikko Securities.

Yesterday's only economic indicator, August consumer credit, was in line with forecasts and did not affect Treasury prices.

The Federal Reserve said the amount of outstanding credit had declined $1.3 billion during August, following a revised $629 million decrease in July.

August was the fourth month in a row in which outstanding credit contracted. The biggest loser was auto lending, which fell by $1.9 billion.

Yesterday's Treasury bill auction again set new lows, reflecting the improvement in the market over the past week.

The $10.8 billion of three-month bills were auctioned at an average rate of 5.04%, down from 5.11% last week and the lowest since June 27, 1977, and the $10.8 billion of six-month bills came in at 5.08%, down from 5.14% and the lowest since May 2, 1977.

The December bond future contract closed unchanged at 100 13/32.

In the cash market, the 30-year 8 1/8% bond was 5/32 lower, at 103 23/32-103 27/32, to yield 7.79%.

The 7 7/8 10-year note fell 1/16, to 103 9/32-103 13/32, to yield 7.38%.

The three-year 6 7/8% note was

Treasury Market Yields

Prev. Prev.

Monday week Month

3-Month Bill 5.14 5.25 5.40

6-Month Bill 5.26 5.30 5.50

1-Year Bill 5.31 5.39 5.57

2-Year Note 5.90 5.97 6.18

3-Year Note 6.13 6.20 6.53

4-Year Note 6.32 6.43 6.68

5-Year Note 6.79 6.89 7.18

7-Year Note 7.14 7.23 7.52

10-Year Note 7.38 7.43 7.71

20-Year Bond 7.68 7.69 7.92

30-Year Bond 7.79 7.80 7.99

Source: Cantor, Fitzgerald/Telerate

down 1/32, at 101 26/32-101 28/32, to yield 6.14%.

In when-issued trading, the seven-year note to be auctioned tomorrow was bid at 7.15%.

Rates on Treasury bills were unchanged, with the three-month bill steady at 5.02%, the six-month bill unchanged at 5.07%, and the year bill unchanged at 5.05%.

In other news, the Federal Home Loan Mortgage Corp. said yesterday that all the firms that had broken rules when bidding for its debt securities agreed to pay penalties.

There are 25 firms in the dealer group and Freddie Mac officials previously had estimated that 18 of those firms had inflated orders or falsified information at auctions.

Last Thursday, Freddie Mac outlined the penalties, including a 20% levy on dealers' commissions at its sales in 1990 and 1991, and gave the firms a 24-hour deadline. But the Public Securities Association persuaded the agency to extend the deadline until yesterday, to give dealers more time to consider the decision.

Other parts of the government are investigating the bidding for agency securities, including the Securities and Exchange Commission.

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