Treasury prices eroded slowly but steadily Friday as a small amount of selling weighed heavily on the thin market, and by late in the day the long bond was off 1/2 point to yield 8.50%.

Kevin Logan, chief economist at Swiss Bank Corp., said Friday's losses were the flip side of Thursday's short-covering rally, which began after the larger-than-expected jump in jobless claims.

"The bond market looks as if something happened, but it's just a reversal of what happened yesterday," Mr. Logan said.

He said the sell-off put the long bond back in the middle of its recent trading range of 8.40% to 8.60%.

Prices may also have been reacting to the Philadelphina Federal Reserve's survey of local businesses, which "reminded everybody that the economy is moving toward a recovery," Mr. Logan added.

The Philadelphia Fed reported Friday that 34% of firms it surveyed

Treasury Market Yields

Prev. Prev.

Friday Week Month

3-Month Bill 5.73 5.74 5.53

6-Month Bill 5.99 6.03 5.84

1-Year Bill 6.32 6.33 6.06

2-Year Notice 6.88 6.95 6.66

3-Year Note 7.34 7.36 7.04

4-Year Note 7.54 7.54 7.29

5-Year Note 7.92 7.91 7.67

7-Year Note 8.16 8.13 7.93

10-Year Note 8.30 8.26 8.07

20-Year Bond 8.50 8.45 8.29

30-Year Bond 8.50 8.45 8.29

said business was better in June, while 19% said business was worse, and 45% reported little change.

"June marks the fourth consecutive month in which the percentage of survey respondents reporting improvement has risen, further evidence suggesting that an upward trend is building," the Fed said.

Supply may have been another factor weighing on the Treasury market.

The government will sell almost $55 billion of bills and notes this week to raise more than $8 billion of new cash. This is the first time in a month the Treasury has auctioned coupons.

The auctions begin with today's $20.4 billion sale of three- and six-month bills, followed by $12.5 billion of two-year notes tomorrow, $9.25 billion of five-year notes Wednesday, and $12.5 billion of year bills Thursday.

Some analysts argue the sales should go well, since all the new paper is short-term, and rates in that area look very attractive compared to the 5 3/4% of funds rate.

But dealers may be wary of the two-year sale, given the short squeeze that occurred after last month's auction.

Traders said the larger-than-expected May federal budget deficit was not a factor in Friday's price declines.

The government said the deficit ballooned to $53.35 billion in May. That is bigger than the $49.9 billion deficit the market expected and represents a 26% increase from the $42.5 billion deficit in May 1990.

At the end of May, the deficit for the fiscal year that began in October totaled $175 billion, up sharply from $151.49 billion at the same point in the previous fiscal year.

The big question facing the bond market is how quickly the economy will recover. But this week's array of indicators is not likely to provide the answer, so Treasury prices will remain stuck in a trading range, participants said.

Most of the numbers due out this week are expected to show strength, but they are May statistics -- and thus old news for the bond market.

"I think you're going to have to see some numbers for June, which you don't get until the following week," said Douglas Schindewolf, a money market economist at Smith Barney Harris Upham & Co.

"Durable goods, auto sales, leading indicators, and personal income and consumption all should be pointing upward," said Brian Wesbury, a vice president at Chicago Economics. "That will be bothersome for the bond market, but it's already priced in stronger numbers.

"What we should see is a pretty flat market," Mr. Wesbury added.

In the absence of any other factor to give a direction to the market, the end of the fiscal quarter on June 30 might be important this week, Mr. Schinderwolf said. "If there are any adjustments to be done to balance sheets by portfolio managers, then that's going to be the dominant factor."

The September bond future contract closed 3/8 lower at 92 19/32.

In the cash market, the 30-year 8 1/8 bond was 15/32 lower, at 95 24/32-95 28/32, to yield 8.50%.

The 8% 10-year note fell 1/4, to 97 27/32-97 31/32, to yield 8.30%.

The three-year 7% note was down 1/8, at 99 1/32-99 3/32, to yield 7.34%.

Rates on Treasury bills were mixed, with the three-month bill up two basis points at 5.58%, the six-month bill stready at 5.75%, and the year bill two basis points higher at 5.97%.

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