Treasury prices posted small gains yesterday when an unexpected drop in the National Purchasing Managers'June report provided additional evidence the economic recovery is a modest one.

Traders interpreted the data as another sign the economy needs additional stimulus from the Federal Reserve. Prices have rallied recently in anticipation of a 25-basis-point rate cut, and today's June employment report is expected to determine whether or not the Fed will move.

Late yesterday, the 30-year bond was 3/8 point higher and yielded 7.74%. That is the lowest closing yield on the long bond since early February.

The price gains occurred in thin trading because most investors had already retired to the sidelines to wait for today's jobs report. Traders said yesterday's activity consisted of dealers adjusting their positions ahead of the data.

"Obviously, the purchasing managers' report was weaker than most people were looking for and that got people a little excited," said Steve Slifer, a money market economist at Lehman Brothers. "But there's been very little trading."

Many participants say Treasury securities have fully priced in a Fed easing and could suffer big losses, especially at the short end, if the employment report shows enough strength to keep Fed policy on hold.

"I'm as pessimistic about the economy and as optimistic about rates as anybody on the Street, and even I think the market has gotten a little ahead of itself," Mr. Slifer said.

Economists surveyed by The Bond Buyer on average expect a 94,000 increase in June nonfarm payrolls, up from the 68,000 gain reported in May.

Most expect the June unemployment rate to retreat from the 7.5% posted in May, with more than half predicting either a 7.4% or 7.3% rate.

Mr. Slifer said the Fed would probably respond quickly to an increase of 50,000 or less in June payrolls. But if the number comes in around 100,000, in line with the consensus forecast, he does not expect any immediate reaction from the Fed.

Economists said Fed policymakers will look at more than just the headlines of the report.

Anthony Karydakis, senior financial economist at First Chicago Securities, said overtime hours and the factory workweek also will be important numbers to watch.

"Both components hit all-time historical highs last month, so apparently both are being stretched to the limit," Mr. Karydakis said."It's important to see if that led to additional hirings, which is the natural next step, in June."

The market started yesterday's session by selling off when a wire service story shook participant's faith in a near-term Fed easing.

Market News Service reported that Fed policymakers seemed reluctant to ease when they met with a group of economists at an American Bankers Association gathering last week.

But those early losses "were totally reversed by the purchasing managers' survey," a government note trader said.

The Purchasing Managers' Index fell to 52.8% in June from May's 56.3% reading. The consensus forecast called for a smaller decline, to 55.2%.

Economists said the report was not as weak as the bond market seemed to think, because it showed the economy continued to grow in June, even though the rate of growth had decelerated.

According to the purchasing manager's association, any reading above 44.5% shows the economy is expanding and any reading above 50% shows the manufacturing sector is growing.

Joan Schneider, a market analyst at Continental Illinois National Bank & Trust, said the June purchasing managers' report was "consistent with continued moderate growth."

Even though the index gave back most of its May gains, it was "nota lot different from what we've seen since last fall," Ms. Schneider said.

Michael Strauss, chief economist at Yamaichi International America, said historically it is unusual for the purchasing managers' index to remain above 50% for long periods.

The bond market also found the employment component of the report encouraging. Employment fell to 46.1% from 49.1% in May, suggesting June nonfarm payrolls may be similarly weak. But Mr. Strauss said the purchasing managers' employment component had given back only about half of its outsized May gain.

Also yesterday, the Treasury said it will sell $9.75 billion of seven-year notes Wednesday, unchanged from the last seven-year auction in April. The sale will raise $3.65 billion of new cash.

Late yesterday, the when-issued seven-year notes were quoted at 6.7l%.

The September bond futures contract closed /32 higher at 100/32

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

The 7 1/2% 10-year note rose 5/16, to 102 27/32-102 31/32, to yield 7.07%.

The three-year 5 7/8% note was unchanged, at 101 15/32-101 17/32, to yield 5.29%.

Rates on Treasury bills were lower, with the three-month bill down two basis points at 3.61%, the six-month bill off three basis points at 3.63%, and the year bill two basis points lower at 3.87%.

Treasury Market Yields

Prev. Prev.

Wednesday Week Month

3-Month Bill 3.61 3.71 3.77

6-Month Bill 3.72 3.83 3.97

1-Year Bill 4.02 4.06 4.25

2-Year Note 4.81 4.96 5.17

3-Year Note 5.29 5.41 5.72

4-Year Note 6.23 6.37 6.59

5-Year Note 6.23 6.38 6.59

7-Year Note 6.66 6.78 6.97

10-Year Note 7.07 7.19 7.33

15-Year Bond 7.41 7.49 7.62

30-Year Bond 7.74 7.81 7.86

Source: Cantor, Fitzgerald/Telerate

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