Most Treasury prices declined slightly yesterday even though the first leg of this week's quarterly refunding, the government's auction of $15.5 billion of three-year notes, met with moderate interest.

Late in the afternoon, short-term notes were down about 1/8 point, while the 30-year bond was 1/4 point higher and yielded 7.72%.

Even though the three-year notes offered investors an attractive yield spread above the funds rate, uncertainty surrounding President-elect Bill Clinton's policies and the state of the economy dampened interest in the auction, traders said.

"Sentiment remains bearish and the factors that people are talking about are the same things they've been talking about for three or four weeks: no Fed ease, the possibility of fiscal stimulus early next year, some slightly stronger economic statistics, and supply," said Frederick Leiner, a market strategist at Continental Illinois National Bank & Trust Co. "Nobody seems willing to step up and buy."

The $15.5 billion of three-year notes was sold at an average yield of 5.17% and will bear a 5 1/8% coupon, up from the 4.69% average yield and 4 5/8% coupon at the last three-year sale in August.

Dealers who bid at the high yield of 5.18% got 90% of what they asked for.

The when-issued notes had been trading at 5.17% when bids were submitted, but the auction results were a relief to traders who worried after the bidding deadline that accepted bids might tail back to 5.21% or 5.22%.

But the rest of the details showed interest in the auction was only modest.

Non-competitive bids for the notes came to only $530 million, the lowest level at a three-year sale in the last few years, and the total of $15.5 billion of bids equaled only 2.33 bids for every security being auctioned, which is also below average for a three-year sale.

Traders noted that activity was abnormally quiet for the day of a refunding auction and said most of the notes had ended up in dealers' hands.

"I wouldn't say it's distributed, but it's certainly well placed," a note trader said. "Dealers own a good amount of it, but they've happy cause the issue cheapened up against other things, so they're under no pressure to sell it."

Traders generally expect better demand for the $11.25 billion of 9 3/4-year notes to be sold today, but say it may be difficult to determine the exact level to bid at the auction.

Traders expect a good auction for the same reason the Treasury said it was reopening the 10-year issue sold in August: The 10-years have been expensive to borrow all fall.

"The issue is special for a reason, because people need it," the note trader said. "There will be a good arbitrage bid against it."

But he said it would be the hardest issue to price, "just because there's so much uncertainty."

And the desk head said he will probably be "flying blind" at today's auction, which he expects will be dominated by "the mortgage guys, the yield curve players and derivative product players."

Traders are also uneasy about buying the 10-year notes ahead of tomorrow's holiday. The cash market is closed in honor of Veterans Day, although the futures market will be opened for a shortened session.

"It's one day less we have to distribute securities this week and I'd be concerned that any momentum we have going into [tomorrow] in either direction will be lost by Thursday," the desk head said.

Dealers said there was no particular reason the long end had performed so much better than the rest of the curve yesterday.

The Commodity Research Bureau index fell, closing .98 point lower at 200.10, which is a positive for the long end. But at the same time, oil prices rose, which is a negative for long-term prices.

The December bond futures contract closed 1/8 higher at 101 19/32.

In the cash market, the 7 1/4% 30-year bond was 10/32 higher, at 94 10/32-94 14/32, to yield 7.72%.

The 6 3/8% 10-year note rose 1/32, to 95 23/2-95 27/32, to yield 6.96%.

In when-issued trading, the new 5 1/8% five-year notes were bid at 5.16%, the 6 3/8% 9 3/4-year notes to be auctioned today were bid at 6.99%, and the 30-year bond to be sold Thursday stood at 7.74%.

Rates on Treasury bills were higher, with the three-month bill up two basis points at 3.09%, the six-month bill up three basis points at 3.30%, and the year bill three basis points higher at 3.49%.

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