Treasury prices closed higher, but off the session highs yesterday, after rallying in very thin trading.

Late in the afternoon, the 30-year bond was up 3/8 point to yield 6.87%, after having been up 3/4 point earlier in the afternoon.

Traders said yesterday's price gains were less impressive than they looked on the surface.

"The backdrop to all this is the thin volume, so the price moves seem to be exaggerated," said Tony Crescenzi, head of fixed income at Miller, Tabak Hirsch & Co.

Flows have been limited all this week because the approach of Friday's May producer price report has left dealers wary and sent many retail investors to the sidelines. Investors are worried that bad inflation news will spur a Federal Reserve tightening.

When trading volume is light, relatively small transactions can have a big impact on prices.

The Treasury market did see some buying yesterday. There were reports of central bank buying at the short end, which traders assumed was related to the interventions in support of the dollar, and some municipal defeasance buying in the intermediate sector.

Traders said the market also benefited when corporate dealers unwound some of the hedges put on Tuesday to offset the $3-billion of new securities that were priced.

The market began to improve yesterday morning in response to another decline in the price of gold and the dollar's firmness against the German mark. The dollar improved after the London Times printed a letter from speculator George Soros saying that the mark was due to decline in value.

The Treasury market's gains picked up steam around midday, when the September bond futures contract broke above a key resistance level at 11016/32, which set off short-covering.

Crescenzi said the short-covering may have been encouraged by talk that the upcoming inflation news will not be as bad as the market fears.

Crescenzi cited remarks by Robert Rubin, chairman of the National Economic Council, who said the bad inflation numbers so far this year might be an aberration. Crescenzi said traders were also talking about an article in yesterday's Washington Post that shows inflation has been higher in the first four months of the year than the last eight months for nine out of the last 11 years.

Traders said bond market participants were too focused on the inflation numbers to pay much attention to the budget developments in Washington.

Late yesterday, wire services reported that Senate Democrats had tentatively agreed to substitute taxes on transportation fuels and electrical power for President Clinton's proposed energy tax based on British thermal units.

Kathleen Stephansen, senior economist at Donaldson, Lufkin & Jenrette Securities Corp., said the shift away from a broad-based energy tax had some worrisome aspects, and she questioned whether it will be possible to achieve the cuts in Medicare costs that have been suggested.

But Stephansen said the enactment of the deficit reduction package was more important than the exact provisions of the package. "If this is what it takes, so be it," she said.

Traders expect another quiet trading session today as the wait for the inflation numbers continues. The only economic news will be the jobless claims number for the week ended June 5. The consensus forecast calls for a 4,000 decline. to 340,000.

The September bond futures contract closed 23/32 higher at 11030/32.

In the cash market, the 71/8% 30-year bond was 13/32 higher, at 1031/32-1033/32, to yield 6.87%,

The 61/4% 10-year note rose 1/4, to 10112/32-10114/32, to yield 6.05%.

The three-year 41/4% note was up 2/32, at 98-/32-983'/32, to yield 4.63%.

Rates on Treasury bills were lower, with the three-month bill down three basis points at 3.11%, the six-month bill off four basis points at 3.27%. and the year bill seven basis points lower at 3.47%. !!!BEGIN TABLE Treasury Market Yields Prev. Prev. Wednesday Week Month3-Month Bill 3.15 3.10 2.946-Month Bill 3.35 3.27 3.071-Year Bill 3.59 3.53 3.222-Year Note 4.27 4.14 3.793-Year Note 4.63 4.48 4.265-Year Note 5.32 5.24 5.037-Year Note 5.69 5.64 5.5310-Year Note 6.05 6.02 5.9130-Year Bond 6.87 6.87 6.85!!!END TABLE

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