Traders say they expect today's seven-year note auction to go poorly, and Treasury prices slipped yesterday as they shored up positions in anticipation.

The long bond finished the day 11/32 lower, to yield 8.52%.

Although trading activity was reported to be extremely light, market participants said price erosion at the long end might have been partially the result of worry that demand for the seven-year notes will be light.

Steven Slifer, a money market economist with Lehman Brothers, attributed the concern to the "jitteryness that frequently accompanies the note auction."

One trader said the notes are "not an overly popular" security, adding, "Nobody's very excited about this."

In when-issued trading, the notes were trading at a price to yield 8.24% yesterday. Market participants say they expect the auction to produce a coupon of about 8.25%.

The $9 billion of seven-years will be a record note sale for the Treasury, and is $500 million more than it offered last quarter. Supply in general is said to be a major concern of the market for the rest of the quarter, with government officials projecting about $100 billion in borrowing needs.

Most analysts were hesitant to attribute yesterday's price declines solely to auction jitters, however. Stephen Gallager, an economist with Kidder, Peabody & Co., said some of the problem may have been a reflection of participants "giving


up on the idea of a quickly flattening yield curve."

And other price discussions included speculation that the Securities and Exchange Commission would investigate reports that a small group of investors had effectively squeezed out the market on the recent two-year note auction.

The questions centered on market rumors that a small number of investors had bought a large chunk of the notes, shutting out the Street and forcing prices higher as dealers tried to cover their shorts.

Wire service reports quoted SEC Chairman Richard Breeden as saying the commission is reviewing the reports to see whether a formal investigation is warranted.

Beyond today's auction, the market is expected to remain extremely quiet until Friday morning, when June's producer price index and retail sales figures will be released. Those numbers might reveal whether the economic recovery that analysis say is under way is causing inflation to heat up as well.

Yesterday, the September bond future contract closed 1/4 point lower at 92 19/32.

In the cash market, the 30-year 8 1/8% bond was 11/32 lower, at 95 17/32-95 21/32, to yield 8.52%.

The 8% 10-year note fell 7/32, to 97 17-32-97 21/32, to yield 8.35%.

And the three-year 7% note was down 1/32, at 98 30-32-99, to yield 7.39%.

Rates on Treasury bills ended the day mixed, with the three-month bill up one basis point at 5.59%, the six-month bill four basis points higher at 5.70%, and the year bill down three basis points at 5.92%. Rate declines in the year bill follow Monday's big drop of seven basis points.

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