Last week's correction carried over into trading yesterday, with no fresh news arose to inspire the market.

The 30-year bond ended 3/4 point lower, to yield 6.09%.

Market participants went back to the drawing board yesterday to figure out the near-term outlook for interest rates and the attractiveness of government securities.

Bond strategists continue to feel their way around the economy to get a grip on fundamentals, a subject on which investors remain decidedly mixed.

With no economic indicators released yesterday, the market focused on technicals and the day trade.

Activity was dominated by a spike in oil prices, which took some steam out of the long end of the market. As oil prices rose more than 40 cents per barrel, funds found an excuse to sell the long bond.

Longer-dated Treasuries, particularly the 10-year note, also came under hedge-related selling from Portugal's $1 billion 10-year note offering and a mounting schedule of corporate supply for the week. The recent rise in long-term rates has prompted corporations to step up plans to bring bonds to the marketplace.

Traders also reported that dealers were selling zero coupon bonds, speculating that reports of delays in a Brazilian debt restructuring lay behind the move.

The short and intermediate sectors of the yield curve were dominated by players setting up for this week's round of Treasury note auctions. Traders said the monthly two-year and five-year note offerings will help set the market's tone. With many suspecting that the economy is more robust than previously thought, traders said they are anxious to see how the market fares at absorbing supply.

"The auctions will give us an idea about demand for Treasuries, " said William Sullivan, director of financial markets research at Dean Witter Reynolds Inc.

The wild card for today's Treasury auction of $16 billion of two-year notes is the housing starts report for August. Participants said that now more than ever, the bond market is vulnerable to any signs of strength in the economy.

Treasury market participants say this is particularly true in interest-rate-sensitive sectors of the economy. The Treasury market therefore will pay close attention to this morning's housing starts release.

Economists interviewed by The Bond Buyer expect housing starts to rebound to a rate of 1.25 million units for August.

As evidenced by a number of recent reports on the housing sector, observers fear that the lowest interest rates in 25 years might have translated into robust activity in the housing sector last month.

The fear is based on basic economics, they say. More starts are likely to mean more building permits, with the usual economic chain reaction leading to a resurgence of orders for commodity and durable goods. Ultimately, that means more jobs, Treasury analysts said.

"Explosive gains in starts and permits would hurt the market, as the recent sell-off will be intensified by any sign that an interest-rate sensitive sector of the economy is doing better," Sullivan said.

The National Homebuilders Association yesterday released its September survey, which indicated further improvement in demand for housing. A post-recession high of 44% of respondents characterized demand for single-family homes as "good." The latest figure is in sharp contrast with last month's reading of 40% and the 29% to 30% range that prevailed during the first six months of 1993.

Other signs that the housing sector is building a solid foundation are steady increases in the Mortgage Bankers Association's weekly index of mortgage applications, a jump in existing home sales in July, and the fact that even the July decline in housing starts was accompanied by an increase in building permits.

Rebuilding efforts in the wake of the floods in the Midwest are also likely to work their way into economic data, economists said.

Sullivan based his argument for strong activity in interest-rate-sensitive sectors of the economy on these and other signs of growth in the economy, particularly in retail sales and inflation.

Sullivan said the consumer price index for August delivered a near-fatal blow to market psychology because it hinted that the economy is not as weak as many had previously thought and that inflationary pressures remain.

"Recent data has the market on the defensive for any sign that the economy is gaining steam." Sullivan said.

Hugh Johnson, chief investment officer at First Albany Corp., believes that the market's correction last week was a prelude to a much larger decline in prices. Like many on Wall Street, he believes that the market went too far, too fast, and that the factors that underpinned the Treasuries buying frenzy are now losing credibility.

Those factors included the belief that the economy would remain weak in the second half of 1993, that inflation would continue to moderate, and that the Federal Reserve would either ease or hold steady on its interest rate policy.

"Recent data has called the market rally into question and the market seems a bit overbought," Johnson said.

Yields were mixed yesterday on 13-week and 26-week Treasury bills at the government's weekly auction. The Treasury Department auctioned $11.2 billion of new 13-week bills at an average discount of 2.93%, compared with down 2.98% last week. The Treasury also sold $11.3 billion of 26-week bills at an average discount of 3.06%, the same discount as last week. The investment rate was 2.99% on the 13-week bills at an average price of $9,926 per $10,000 face value. The rate on the 26-week bills was 3.15% at $9,845.

In futures, the September contract ended down 18/32 to 119.27.

In the cash markets, the 3 7/8% two-year note was quoted late yesterday down 3/32 at 99.29-99.30 to yield 3.90% the 4 3/4% five-year note ended down 7/32 at 99.24-99.26 to yield 4.79%, the 5 3/4% 10-year note was down 14/32 at 102.09-102.13 to yield 5.43%. and the 6 1/4% 30-year bond was down 24/32 at 102.01-102.05 to yield 6.09%.

The three-month Treasury bill was down basis point at 2.95%, the six-month bill was down one basis point at 3.07%, and the year bill was down one basis point at 3.28%.Treasury Market Yields Prev. Prev. Monday Week Month3-Month Bill 2.99 3.01 3.046-Month Bill 3.14 3.14 3.191-Year Bill 3.38 3.30 3.402-Year Note 3.90 3.80 3.923-Year Note 4.21 4.09 4.295-Year Note 4,79 4.66 4.967-Year Note 4.98 4.85 5.2210-Year Note 5.43 5.27 5.6030-Year Bond 6.09 5.87 6.21Source: Cantor, Fitzgeral/Telerate

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