Treasury prices suffered a small setback Friday, after rising slowly but steadily for most of last week, but the sell-off left the market's bullishness intact.

The current prognosis for a modest economic recovery accompanied by restrained price pressures is good news for bond prices, traders, and analysts say.

Most participants think the Treasury market is in good enough shape to ensure a smooth reception for this week's many auctions.

The treasury will sell $23.2 billion of three- and six-month bills today, $15 billion of two-year notes tomorrow, $10.25 billion of five-year notes Wednesday, and $14.25 billion of year bills Thursday.

Traders said all the securities to be sold are at the short end, the area investors have favored recently.

The persistent hopes for another easing in Fed monetary policy will be a plus, as will the two note issues' generous yield advantage over the funds rate, they said.

Gary Schlossberg, a senior economist at Wells Fargo Bank, sounded a note of caution.

"The short end is probably more vulnerable, given the fact that it does appear to be pretty expensive," Mr. Schlossberg said.

Because a lot of the run-up in short-term reflects expectations that the Fed will ease sooner rather than later, "unless the Fed moves quickly, and I don't think they will, we could get an unwinding of the move into the short end," he said.

During the early part of the week, there will be little news to distract the market from supply considerations.

The first indicator is not until Wednesday morning, when the May durable goods report will give the market some insight into the state of manufacturing. Another important indicator, the mid-June car sales statistics, also comes out on Wednesday. Car sales will be watched carefully for clues to consumer spending.

Friday's Trading

Treasury note and bond prices closed 1/4 to 3/8 point lower Friday, with the 30-year bond of 3/8 point to yield 7.82%.

The market opened lower in New York as some of the flight-to-quality purchases that occurred earlier in the week on stock market worries were reversed after Japanese stocks bounced back overnight.

The Nikkei index of Japanese stock prices rose 474.31 points, or 3%, to 16,519.87, after posting big losses for two sessions in a row.

"There has been some flight-to-quality buying in U.S. Treasuries and that trade seems to be reversing," said Frederick Leiner, a financial markets strategist at Continental Illinois.

Mr. Leiner said the front end, the traditional haven in the case of a flight to quality, led the market lower Friday.

In mid-morning, Treasury prices came off their lows when the Philadelphia Fed reported its survey of local businesses showed the growth in manufacturing activity had slowed during June.

The Philadelphia Fed's diffusion index fell to 10.9 in June from 19.6 in May, instead of showing a small increase as the market expected.

Treasury prices drifted lower again during the afternoon when a screen service reported remarks by Fed governor Edward Kelly that suggested the Fed was not likely to ease again.

Mr. Kelly's remarks took their heaviest toll on the front end, and consequently the yield curve flattened, with the 30-year's yield advantage to the two-year note narrowing to 287 basis points from 291 late Thursday.

The University of Michigan's preliminary June results, released to subscribers Thursday night, matched the market's expectations and had little impact on prices. The Michigan confidence measure rose to 80.6 in June from 79.2 in May.

Daniel Seto, an economist at Nikko Securities, said the Michigan index was still below the levels posted before the recession, when the index used to register in the 90s.

"We're moving in the right direction, but we need a little more in the coming months," he said.

Some traders argued that all of the day's numbers and rumors were just an excuse for participants to lighten up ahead of the weekend.

"People were bullish on the market, but recognized it had been up quite a few days in a row and it was unlikely to continue forever," a bond trader said.

The September bond futures contract closed 11/32 lower at 100 1/32.

In the cash market, the 30-year 8% bond was 11/32 lower, at 101 27/32-101 31/32, to yield 7.82%.

The 7 1/2% 10-year note fell 3/8, to 101 24/32-101 28/32, to yield 7.23%.

The three-year 5 7/8% note was up 5/32, at 101-101 2/32, to yield 5.47%.

In when-issued trading, the two-year note to be sold tomorrow was quoted at 5.07%, up from 4.99% late Thursday, and the five-year note to be auctioned Wednesday was offered at 6.46%, up from 6.39%.

Rates on Treasury bills were higher, with the three-month bill up four basis points at 3.66%, the six-month bill up seven basis points at 3.77%, and the year bill eight basis points higher at 3.98%.

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