Treasury prices were lower at the end of a choppy trading session yesterday as participants continued to fret over how federal tax cuts would affect their market.

Traders said yesterday's losses also showed dealers were adjusting their positions ahead of this week's supply. The Treasury will sell $13.5 billion of two-year notes today and $9 billion of five-year notes tomorrow, and the dealers are also aware that the quarterly refunding is approaching early next month.

Late in the day, the 30-year bond was off 1/4 point and yielded 8.09%.

Yesterday's losses followed the 1 3/8-point decline at the long end on Monday, in response to bipartisan talk in Washington, D.C., about enacting some kind of tax cuts to stimulate the economy.

Treasury Market Yields

Prev. Prev.

Tuesday Week Month

3-Month Bill 5.19 5.08 5.32

6-Month Bill 5.34 5.17 5.44

1-Year Bill 5.42 5.25 5.50

2-Year Note 6.00 5.81 6.11

3-Year Note 6.26 6.07 6.35

4-Year Note 6.41 6.27 6.55

5-Year Note 6.97 6.76 7.05

7-Year Note 7.35 7.11 7.34

10-Year Note 7.66 7.41 7.55

15-Year Bond 7.89 7.69 7.81

30-Year Bond 8.09 7.85 7.88

Source: Cantor, Fitzgerald/Telerate

Treasury traders worried that tax cuts would add to the deficit, inflating the amount of Treasury supply, and also stimulate inflationary pressures, thus reducing the chances for further Fed easing.

In the absence of any other news, participants reacted by dumping Treasury securities.

"The selling pressure has been continuous," a coupon trader said.

There were reports that a lot of yesterday's selling, especially in the 10-year area, was done by property and casualty insurance companies in anticipation of paying off claims from the Oakland, Calif., fire.

But no traders admitted to seeing such trades themselves, and a few insurers with exposure in California, including State Farm Fire and Casualty, Farmers, and Safeco, denied having sold Treasury securities yesterday.

A note trader said he thought nervousness about potential tax cuts was the market's main problem, combined with the upcoming supply and some worries about inflation left over from last week's unfriendly consumer price report.

"We're all spooked by fiscal policy and the fact that Democrats and Republicans are both in favor of tax cuts," the trader said. "Both parties are exuberant about rapid passage."

All Democrats in the House and many in the Senate face the same election-year pressure that President Bush does, so both sides have good reason to push for passage of the measure, he said.

Even though the market felt heavy yesterday, the higher yields that resulted from the sell-off may make this week's auctions go more smoothly.

Joseph Liro, a money market economist at S.G. Warburg & Co., argued the two-year sale today should be a "blow-out." Late yesterday, the when-issued two-year was bid at 6.02%.

"The yield's back over 6%, and I think we'll see strong domestic demand for it," Mr. Liro said. "With funds at 5 1/4%, and the chance that they're going to go lower, and an economy this weak, just on a carry basis the two-year has a lot of attraction."

The December bond future contract closed 15/32 lower at 97 21/32.

In the cash market, the 30-year 8 1/8% bond wass 9/32 lower, at 100 6/32-100 10/32, to yield 8.09%.

The 7 7/8% 10-year note fell 5/16, to 101 9/32-101 13/32, to yield 7.66%.

The three-year 6 7/8% note was off 1/16, at 101 15/32-101 17/32, to yield 6.26%.

In when-issued trading, the five-year note to be auctioned tomorrow stood at 6.98%.

Rates on Treasury bills were mixed, with the three-month bill up two basis points at 5.06%, the six-month bill three basis points higher at 5.14%, and the year bill steady at 5.15%.

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