More signs of purring economy rouse bears from their slumber.

The U.S. economy came out of hibernation last week and sent the bears marching into the Treasury market.

Woken abruptly by compelling signs of strength in the economy, idled investors piled out of their caves and into the market to sell fixed-income securities.

The economic fundamentals continue to bear the marks of recovery, and the market doesn't like it, observers said. Pervasive signs of growth have put fixed-income investors on the defensive in recent weeks and placed the spotlight on every stitch of economic news - even reports that historically have held little significance for Treasuries, observers said. Therefore, the market remains extremely vulnerable to hints of strength.

For the first time in months, dealers are seeing long-term accounts liquidating long positions. And for the first time in weeks, the market is taking the recent downdraft in prices seriously, instead of discounting it as a consolidation.

But while market players are decidedly mixed on the long-term outlook for Treasuries, one thing is clear in the short term: The market has a bumpy ride ahead of it.

"The market is very rattled and is naturally taking a defensive posture going into yearend," said Joseph Liro, chief economist at S.G. Warburg & Co. "The view is that with real growth better than 4% in the fourth quarter, how could inflation be far behind."

Inflation has yet to pose a significant threat to the bond market, but observers believe the potential is there. The great debt market rally of 1993 was predicated on the belief that the overall inflation rate was moving lower. But in recent weeks, upward pressures in some inflation indicators have dealt a sobering blow to the bond market and supported the notion that inflation remains low, but not dead.

Of particular concern to investors in fixed-income debt are persistent upward pressures in the prices of gold, oil, lumber, and a number of other commodity futures contracts. Analysts have begun forecasting a deeper correction in commodity futures, a trend that is likely to spill over into the Treasury cash and futures markets.

Technical analysts agreed that the Commodity Research Bureau index has reached a zenith in its recent trading range and may be poised for a break to the upside. Analysts agreed that a break above long-standing resistance levels would be a dangerous development for the Treasury market.

The recent spike in long-term interest rates is also costing the Treasury market two key sources of sponsorship: money from municipal and mortgage-backed securities investors. State and local governments have been big buyers of short and intermediate Treasuries as part of defeasance programs, as have holders of mortgage-backed paper who have been hit by stepped-up prepayment speeds.

"This kind of sponsorship ends when you're moving from a bull market into the first leg of a bear market," Liro said. "That's the point we're at now."

Keeping many players from abandoning the Treasury market altogether is the belief that the current acceleration in economic activity will be short-lived and that growth will stall in the first and second quarters of 1994.

Observers point to a number of factors that will tend to hinder any pickup in economic growth next year. They include uncertainty over upcoming health care reform and higher taxes, ongoing corporate restructuring, the scale-back in the defense industry, the weak commercial real estate market, and the lack of new and innovative consumer products.

"I think the fixed-income markets will receive plenty of solace from a slowdown in the economy next year and the resulting lack of inflation pressures," said Frederick Sturm, an economist at Fuji Securities in Chicago.

Led by the long end of the curve, the Treasury market plunged on fears of stronger economic growth and the potential for higher inflation.

The 30-year was down more than 1 1/4 to yield 6.33%.

Weak fundamentals and technicals forced note and bond prices lower and traders reported broad-based selling and little in the way of buying interest.

The December bond contract broke below long-standing support at 115.10 and traders said additional losses were likely as many technical indicators are beginning to indicate that the downward correction has not run its full course. Treasury Market Yields Prev. Prev. Friday Week Month3-Month Bill 3.12 3.11 3.046-Month Bill 3.28 3.24 3.151-Year Bill 3.50 3.39 3.292-Year Note 4.19 4.09 3.893-Year Note 4.55 4.44 4.155-Year Note 5.15 5.00 4.747-Year Note 5.38 5.22 4.9310-Year Note 5.82 5.64 5.3930-Year Bond 6.33 6.14 5.97 Source: Cantor, Fitzgerald/Telerate

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