The Treasury market, intent on one last fling before the August refunding, rallied yesterday on a surprisingly weak durable goods report and added to its gains after the strong five-year note auction.

Late in the day, the 30-year bond was up 3/4 point, to yield 8.41%.

That gain was not impressive by historical standards, but it is the biggest one-day move the range-bound Treasury market has seen in a few weeks.

The market got off to a good start when the June durable goods report set off a wave of buying.

The Commerce Department reported that June orders fell 1.6%, when the consensus forecast was for a 1.2% increase. The unexpected weakness in orders supported hopes for a feeble recovery.

Treasury prices reached new highs during the afternoon when the auction results showed strong demand for the five-year notes.

Treasury Market Yields

Prev. Prev.

Wednesday Week Month

3-Month Bill 5.73 5.75 5.71

6-Month Bill 5.94 6.01 5.99

1-Year Bill 6.22 6.30 6.32

2-Year Note 6.87 6.89 7.00

3-Year Note 7.24 7.30 7.39

4-Year Note 7.39 7.47 7.58

5-Year Note 7.85 7.92 7.98

7-Year Note 8.08 8.16 8.20

10-Year Note 8.22 8.29 8.32

20-Year Bond 8.36 8.49 8.51

30-Year Bond 8.41 8.49 8.50

Source: Cantor, Fitzgerald/Telerate

The $9.25 billion of notes came at an average yield of 7.89% and will bear a 7 7/8% coupon, little changed from the 7.96% average and 7 7/8% coupon at last month's five-year sale.

The 7.89% average was what the market expected at bidding time. Analysts said other signs of strength included the above-average total of bids tendered and the number of noncompetitive bids.

Joseph Liro, a money market economist at S.G. Warburg & Co., said the auction went well because bond funds needed to invest cash they had accumulated recently when investors transferred money from money market accounts and certificates of deposit.

"I think you had some bond funds sitting on some cash that they've recently attracted from small investors looking for yield," he said.

The bond funds liked the five-year notes because of their yield, currently more than 200 basis points above the fed funds rate, Mr. Liro said.

"The five-year note is a yield bull," he said. "You're getting a lot of yield pickup for not much extension in maturity."

By contrast, investors who bought 30-year bonds yesterday, committing their money for another 25 years, got only 56 basis points more than on five-year notes.

Steven Woods, director of financial markets research at Bank of America, said the surprisingly weak durable goods report that started yesterday's rally was another reason the auction went well.

After the durables report, "everybody sat around talking about a double dip or a really, really sluggish recovery," Mr. Woods said. "I think that bulled people up to expect the five-year would go well."

By the time the auction results were announced, eager buyers had already chased down to 7.86% the yield on the when-issued notes, and late in the day, the new five-years closed at 7.85%, a impressive gain from the 7.89% average at the auction only a few hours earlier.

A government note trader said yesterday's auction may mark the beginning of a comeback for the five-year note.

The five-year has risen steadily in yield since January, when the government began selling them every month instead of once a quarter.

"Perhaps we've finally put the curve back far enough to handle this extra supply we get every month," the trader said.

Yesterday's rally got added impetus from a drop in precious metals prices, lackluster mid-July auto sales, and the market's break through a resistance level on the bond futures contract.

Mid-July auto sales slipped to a 6.6 million annual pace, down from the 7.3 million rate in early July. Mr. Liro pointed out, though, that sales are still running ahead of production.

And the Commodity Research Bureau index plunged yesterday on a decline in the prices of silver and gold, more than reversing Tuesday's gains on higher grain prices. The CRB index closed 2.75 points lower at 209.18.

Traders and analysts questioned whether the market will be able to add to yesterday's gains, given the quarterly refunding auctions to be held in early August. Economists expect the Treasury to sell about $38 billion of three-year and 10-year notes and 30-year bonds.

Mr. Liro said the market's tone today will be set by the initial jobless claims report this morning and the weekly money supply data this afternoon.

"If jobless claims are sharply higher, we could see another move up," he said. "And if M2 isn't strongly higher, up $3 billion to $6 billion, I think that will be another reason people will be interested in Treasuries."

Analysts surveyed by The Bond Buyer expect new jobless claims to rise 17,000, to 412,000, for the week ended July 13.

Traders said the last of this week's auctions, the sale of $12.5 billion of year bills, should go without a hitch.

The September bond future contract closed 7/8 higher at 94 5/32.

In the cash market, the 30-year 8-1/8% bond was 13/16 higher, at 96-24/32-96 28/32, to yield 8.41%.

The 8% 10-year note rose 15/32, to 98-12/32-98 16/32, to yield 8.22%.

The three-year 7% note was up 5/32, at 99 10/32-99 12/32, to yield 7.24%.

In when-issued trading, the 6 7/8% two-year note was 1/8 higher, at 99-31/32-100, to yield 6.87%, down from the 6.94% average at Tuesday's auction.

Rates on Treasury bills were lower, with the three-month bill down two basis points at 5.58%, the six-month bill down four basis points at 5.7%, and the year bill five basis points lower at 5.88%.

June Durables Report

Even though the market rallied on the poor showing by June durable goods orders, economists downplayed its significance.

The durable goods series always fluctuates a lot and June's decline follows two months of increases, they said.

The Commerce Department yesterday revised May's increase down to 2% from the 3.4% rise reported last month. In April, durable orders rose 3.6%.

The June report was "more characteristic of volatility than of any significant downturn in the economy," said Stephen Gallagher, an economist at Kidder, Peabody & Co.

In order to look past the bounces in the data, Mr. Woods of Bank of America suggested using a three-month moving average.

On that basis, "the trend is clearly improving," he said. "It shows the factory sector is improving, but it's not running away with itself."

The decline in orders was led by a 10.1% plunge in electronic equipment and a 4.7% drop in industrial machinery. Those losses were partly offset by a 3.7% rise in transportation orders.

Excluding defense, orders fell on y 0.4%.

Peter D'Antonio, an economist at Chemical Securities, took a less upbeat view of yesterday's report.

"The series is volatile, no doubt about it," Mr. D'Antonio said. "But these numbers were very weak, mostly in machinery."

He said the 1.1% decline in unfilled orders, the fourth consecutive monthly decrease in that component, was a bad sign.

The weakness in orders backlogs is mostly in nondefense capital goods, Mr. D'Antonio said. "That means capital spending mostly will remain weak."

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