Treasury prices sold off briskly Friday when a spectacular increase in July durable goods orders shattered expectations that the Federal Reserve would ease again soon.

By late in the day, the 30-year bond was off 7/8 point, where it yielded 8.12%, and short-term notes were down 1/4 to 5/8 point.

Durable goods orders are seen as a leading indicator of the economy's direction, and analysts said the strength shown in Friday's report will keep the Federal Reserve from easing monetary policy in the near future.

That was bad news for Treasury market participants, many of whom had acquired large positions of bills and short-term notes in hopes of such a move by the Fed. Traders said they saw steady selling Friday as dealers and retail accounts liquidated those long positions.

The Census Bureau said new orders for durable goods rose 10.7% in July, the largest monthly gain in

Treasury Market Yields

Prev. Prev.

Friday Week Month

3-Month Bill 5.52 5.37 5.73

6-Month Bill 5.68 5.50 5.93

1-Year Bill 5.80 5.59 6.22

2-Year Note 6.40 6.25 6.84

3-Year Note 6.76 6.66 7.20

4-Year Note 6.86 6.81 7.33

5-Year Note 7.36 7.30 7.80

7-Year Note 7.68 7.62 8.04

10-Year Note 7.86 7.82 8.19

20-Year Bond 7.06 8.04 8.34

30-Year Bond 8.12 8.08 8.38

Source: Cantor, Fitzgerald/Telerate

more than 20 years. The jump was far above the 1.4% increase the market expected.

A 24.5% surge in transportation orders led the increase, but analysts said most other categories also showed good gains.

"Transportation did have a major role, but even outside that, orders increased 6%," said Daniel Seto, an economist at Nikko Securities Company International. "This is not something to be dismissed."

Some economists said seasonal factors may have exaggerated the increase in durables, and many pointed out that the series is very volatile.

Still, they said the broad-based gains could not be ignored, especially since they mean that an loosening in Fed monetary policy has been put on hold.

"The slight chance of [the Fed] moving today or in the next few days is gone," said Elias Bikhazi, a money market economist at Security Pacific National Bank. "That's taking its toll on the market."

Mr. Seto said he had been expecting the Fed to ease in early September, after the August employment statistics were released.

Given the gain in orders, he now thinks it will be a month or more before the Fed acts.

"Even if we got a weak employment report, the Fed would be willing to hold off even longer," Mr. Seto said. "As long as the economy looks as if it's beginning to do better, there's no need for the Fed to add further stimulus."

Some economists argued the bond market may have seen the final Fed easing for this business cycle.

"This durables report is consistent with a modest recovery," said Kevin Logan, chief economist at Swiss Bank Corp. "Given the current situation, I don't think the Federal Open Market committee will see a need for lowering interest rates again."

But most analysts said the other problems facing the economy will eventually force the Fed to loosen credit again.

"This recovery is anemic," said Ward McCarthy, a managing director at Stone & McCarthy Research Associates in Princeton, N.J. "If you look at the factors that caused them to ease the last time, they're still largely in place. Monetary growth verges on being alarming.

"It looks as if we're headed for a prolonged period of substandard economic growth and that we'll periodically need little jolts of stimulation from monetary policy," Mr. McCarthy added.

He said the Fed could ease after the August employment report on Sept. 6, or after the August inflation reports come out in mid-September.

The market repriced itself to lower levels immediately after the indicator Friday morning, and for the rest of the day activity was slow.

During the afternoon, the market got some weak car sale figures for mid-August, but the news had little effect on prices.

A government bond trader said the market got a temporary lift when General Motors reported its sales fell 13.4% in mid-August.

But renewed selling soon erased the gains on GM's report, the trader said. "There were sellers all day."

With most of the automobile manufacturers reporting, analysts estimate mid-August sales at a lackluster annual rate of 6.1 million units, below the 6.5 million pace the market expected.

Even though the number was weaker than expected, "the market didn't care," said Stephanie Murphy, a money market economist at Manufacturers Hanover Securities Corp. "They were still reeling from durable goods."

Ms. Murphy said, though, that Friday's auto sales numbers do not bode well for future durable goods reports. "If car sales continue to pull back to the low 6s, after a while new orders for autos will peter out."

A salesman of Treasury securities said the sell-off showed participants were getting rid of securities they acquired at the beginning of the week, when the Soviet coup caused a flight to quality.

"The market was just mispositioned," he said. "Starting on Monday, everybody needed something at the front end of the market and they were buying stuff at ridiculous prices."

Traders said the strength in the durable goods report will make the market very sensitive to any other statistics suggesting the economy is doing better than expected. But most of this week's indicators are minor.

"Given that it's the week before Labor Day, following one of the more turbulent weeks in memory, I don't think there's going to be much excitement," Mr. McCarthy said.

He said the market will focus on the Treasury's auctions of $12.5 billion of two-year notes tomorrow and $9.25 billion of five-year notes Wednesday.

The supply is likely to add to the pressure at the front end. And traders said the auctions may also be affected by the Salomon scandal.

Since Salomon revealed its illegal bidding practices, traders have become wary about exchanging any information as the auctions approach. They said that probably means sloppy bidding at the sales, and may have more serious consequences.

One trader suggested this scenario: "People get scared, they back off their bids, and before you know it, you've got a market in full retreat."

The September bond future contract closed 27/32 lower at 97 8/32.

In the cash market, the 30-year 8 1/8% bond was 7/8 lower, at 99 28/32-100, to yield 8.12%.

The 7 7/8% 10-year note fell 5.8, to 99 30/32-100 2/32, to yield 7.86%.

The three-year 6 7/8% note was down 3/8, at 100 7/32-100 9/32, to yield 6.76%.

In when-issued trading, the two-year note to be auctioned tomorrow stood at 6.43% and the five-year note to be sold Wednesday was bid at 7.40%.

Rates on Treasury bills were sharply higher, with the three-month bill up eight basis points at 5.38%, the six-month bill up 15 basis points at 5.46%, and the year bill 13 basis points higher at 5.49%.

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