Federal Reserve Vice Chairman David Mullins's comments yesterday shook the market's conviction that the Fed will ease again soon and wiped out earlier gains in the Treasury market.

Late in the day, prices were little changed, with the 30-year bond steady and yielding 7.78%.

"The Mullins comments burst the bubble on the short market," a government coupon trader said.

The trader said most participants probably still expect the Fed to cut the discount rate and funds rate before yearend, but Mr. Mullins's remarks "set the tone for some profit-taking and some curve unwinding" yesterday.

The Fed vice chairman was somewhat pessimistic about the near-term economic prospects, forecasting a couple of "flat quarters" before growth picks up again. He said, though, that he does not expect "a renewed downturn."

But he told the National Economists Club the series of easings the Fed has already undertaken should result in positive growth by the middle of next year.

The current situation is an unavoidable

Treasury Market Yields

Prev. Prev.

Tuesday Week Month

3-Month Bill 4.27 4.46 4.73

6-Month Bill 4.33 4.50 4.87

1-Year Bill 4.42 4.61 4.95

2-Year Note 5.04 5.26 5.62

3-Year Note 5.41 5.61 5.95

4-Year Note 5.55 5.72 6.04

5-Year Note 6.24 6.36 6.62

7-Year Note 6.70 6.81 7.01

10-Year Note 7.20 7.26 7.34

15-Year Bond 7.53 7.62 7.60

30-Year Bond 7.78 7.89 7.78

Source: Cantor, Fitzgerald/Telerate

adjustment as the economy works out the excesses of the 1980s, Mr. Mullins said, and "there is nothing that monetary policy can do to avoid this adjustment."

He also said he did not want to reignite inflation.

Mr. Mullins also said that monetary policy could help the economy make its way through the adjustment, but the bond market seemed to concentrate on the unfavorable remarks.

Analysts said that even though some of the comments seemed unpromising, they were far from conclusive evidence that Fed policy is on hold.

Astric Adolfson, a vice president at McCarthy, Crisanti & Maffei Inc., said that "reading between the lines" of Mr. Mullins's remarks showed the economy is not doing as well as the Fed expected and inflation is abating. Those conditions suggest the Fed has room to ease again, she said.

Long-term prices spiked briefly when Mr. Mullins said it was worth studying the possibility of shifting some Treasury issuance from the long end.

But when subsequent wire accounts made it clear he had not endorsed the idea, the long end gave up those gains.

"The bond market should know that for an academic to say 'study' means just that," Ms. Adolfson said.

Treasury prices, which had run up overnight and in early New York trading on easing hopes and some ne vousness about developments in the Soviet republics, had come off their highs even before Mr. Mullins spoke.

A note trader said some speculative accounts bought securties expecting a discount rate cut this morning and sold when that did not happen.

"We didn't get the discount rate cuts and things started getting squishy, so they decided to get out," he said.

And traders were upset by a rumor that the Fed had sold two-year and three-year notes under the table, the trader said. In recent weeks, steady Fed buying in that area has been an important factor supporting the market.

The market ignored yesterday's indicators, which included a 13.1% decline in October housing completions.

Traders said the focus is on the numbers coming out tomorrow and Friday, which are expected to be good for the market. Economists surveyed by The Bond Buyer expect Thursday's November producer prices to rise 0.3%, with a matching core rate, and last month's retail sales to fall 0.1%.

But even if this week's numbers are favorable, the approach of yearend may keep tradig choppy, since many retail accounts close their books early and result in a small negative bias as the remaining players try to pare down their positions, trader said.

Ms. Adolfson said the market was also nerous because it has already priced in a lot of good news.

The short end is waiting anxiously for the easing it has already accounted for in prices, she said, and the long end has to worry about a possible bounceback in the economy and what type of fiscal package Congress will come up with next year.

The March bond future contract closed 3/32 lower at 100 19/32.

In the cash market, the 30-year 8% bond was unchanged at 102 12/32-102 16/32, to yield 7.78%.

The 7 1/2% 10-year note rose 1/16, to 101 30/32-102 2/32, to yield 7.20%.

The three-year 6% note was up 1/32, at 101 16/32-101 18/32, to yield 5.41%.

Rates on Treasury bills were mixed, with the three-month bill at 4.18%, down three basis points from Monday's auction average, the six-month bill at 4.19%, off one basis point from the auction average, and the year bill up four basis points on the day at 4.25%.

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