Treasury prices ended with small gains yesterday as an anticipated cut in key rates by the Federal Reserve ontinued to support the bond market.

The 30-year bond was up 1/8 point late in the day to yield 7.74%.

Prices fell at midday, when the Fed signaled that it had not made any change in monetary policy by draining reserves. But the market soon recovered as traders decided the Fed intervention yesterday did not rule out a cut in rates today.

The Fed drained reserves with a round of overnight matched sales agreements when funds were trading at 4 3/8%, showing it was still targeting a 4 1/2% rate.

The Federal Open Market Committee met yesterday, and anaylsts said the Fed's intervention may just show Fed policymakers had not come to any decision by fed time and did not want to mislead the market.

"The funds rate was soft and if they had stayed out of the market, participants might have concluded this was a passive easing or an implicit acceptance of a lower funds rate by the Fed," said Michael Moran, chief economist at Daiwa Securities International.

Some traders said an article in The New York Times yesterday about Federal Reserve Chairman Alan Greenspan supported their hopes for a near-term easing.

According to the Times story, Mr. Greenspan is so concerned about the economy that he thinks it may take fiscal stimulus, in addition to easier monetary policy, to revive the recovery. The article said he is particularly worred about the impact of the heavy debt burden carried by both individuals and businesses.

Traders said the article raised hopes that the Fed would ease even more than expected. The market had been anticipating a 1/2-point cut in the discount rate to 4% and a 1/4-point cut in the funds rate to 4 1/4%.

Since the Fed chairman is scheduled to testify before the House Ways and Means Committee at 9 a.m., est, today, traders will be watching for an announcement of a discount rate cut before the hearing begins.

If the Fed does not lower rates this morning, traders expect short-term prices to fall, especially since the short end gets hit with supply

Treasury Market Yields

Prev. Prev.

Tuesday Week Month

3-Month Bill 4.20 4.27 4.64

6-Month Bill 4.29 4.33 4.73

1-Year Bill 4.36 4.42 4.82

2-Year Note 5.00 5.04 5.48

3-Year Note 5.34 5.41 5.82

4-Year Note 5.45 5.55 5.92

5-Year Note 6.23 6.24 6.55

7-Year Note 6.71 6.70 6.96

10-Year Note 7.17 7.20 7.36

15-Year Bond 7.79 7.53 7.72

30-Year Bond 7.74 7.78 7.91

Source: Cantor, Fitzgerald/Telerate

today and tomorrow. The Treasury will sell $13.5 billion of two-year notes this afternoon and $9 billion of five-years tomorrow.

A note trader estimated the two-years, which were quoted at 5.03% in when-issued trading late yesterday, could come with a 5 1/8% coupon if The Fed fails to act. And a bill trader predicted a "bloodbath," saying the three-month bill rate, which stood at 4.11% late yesterday, could back up to 4.23%.

If the Fed does ease, traders said prices are unlikely to move much higher, since the move has already been accounted for in current price levels.

What the Fed does is the key to how the auctions go, but the note trader said year-end constraints may play a role.

"The majority of people have their hands tied, since it's the end of the year," he said. "That would usually mean a bigger concession."

He is bullish on notes in the short term, arguing that the short end "can never suffer as long as the Fed holds that carrot in front of it."

In the long term, the trader said the probability that the Treasury will shift some issuance to the short end from the long end is bad news. "At some point, when the Fed seems to be done, the front end's going to fall out of bed and it'll happen fast."

Traders said rumors about Citibank, which were denied by the bank, provided some support to prices yesterday afternoon.

The November housing starts number released yesterday morning was stronger than the market expected, but had little effect on prices.

Starts fell only 2.1% in November, to a 1.06 million unit annual rate, compared to a consensus forecast of a 3.9% decline.

Michael Niemira, business economist at Mitsubishi Bank, said even though the housing starts report was better than expected, the impact on the economy was limited.

"Housing starts alone will not lead an upswing in the economy," Mr. Niemira said. "These numbers, rather, point to the fact that the economy is struggling but is not necessarily as bad as people think."

The March bond future contract closed 5/16 higher at 101.

In the cash market, the 30-year 8% bond was 3/32 higher, at 102 26/32-102 30/32, to yield 7.74%.

The 7 1/2% 10-year note rose 1/32, to 102 5/32-102 9/32, to yield 7.17%.

The three-year 6% note was up 1/16, at 101 22/32-101 24/32, to yield 5.34%.

In when-issued trading, the five-years to be sold tomorrow were bid at 6.24%.

Rates on Treasury bills were lower, with the three-month bill down three basis points at 4.11%, the six-month bill of three basis points at 4.16%, and the year bill four basis points lower at 4.18%.

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