The ferocious selling that battered the Treasury market late last week tapered off yesterday, and note and bond prices closed narrowly mixed after a typically quiet Monday session.

Late in the day, the 30-year bond was up 1/8 point to yield 7.44% intermediate notes were marginally lower, and notes maturing in five years and less ranged from unchanged to slightly higher.

Traders said the fact that the market had stabilized suggested dealers had gotten their inventories down to acceptable levels.

After posting big gains early last week, the Treasury market began to sour on Wednesday when retail investors shunned the five-year not auction and dealers proceeded to dump the unwanted securities.

The Treasury market will probably head lower within the next couple of sessions, though, traders and analysts say, because of worries about the July employment report to be released Friday and the huge amount of new securities to be sold at next week's quarterly refunding.

Yesterday, prices moved lower in early New York trading as participants sold securities because of worries that the July national purchasing managers' index would be as strong as the Chicago report released last Friday. The Chicago index jumped 3.5 points in July.

But when the national purchasing managers' report came out, it showed only a 1.4-point increase, in line with expectations, and that news allowed the market to improve slowly later in the morning.

"Before the report, the market was getting hit hard," a government coupon trader said. "But the number came in at consensus and was received with relief."

The purchasing managers' index rose to 54.2% in July from the 52.8% June reading, marking the sixth month in a row the index has exceeded 50%. According to the purchasing managers' group, a reading above 50% indicates the manufacturing sector is expanding.

The index for July was "in the range it's been in the past few months, which suggests continuing modest growth," said Joan Schneider, an economist at Continental Illinois National Bank & Trust Co.

The improvement in the index occurred as the production, new orders, and new export orders components all posted increases. Despite the signs of growth, the employment index fell to 45.8% in July from 46.1% in June and 49.1% in May.

Michael Strauss, chief economist at Yamaichi International (America), said the decline in the report's employment component was good news for short-term Treasury securities, as was the unexpected weakness in yesterday's other indicator, June construction spending.

That report showed construction spending dropped 1.5% in June, when the consensus forecast called for no change.

Mr. Strauss added that the front end also benefited because some investors took off yield-curve flattening trades. "One or two big accounts cashed in on the trade [by] covering shorts at the front end," he said.

On the other hand, Mr. Strauss said, the long bond "felt some pressure from the price component in the purchasing managers' report, which was up pretty big."

The price component of the July purchasing managers' report rose to 58.2%, its highest level since December 1990, from 55.6% in June.

The next big event for the Treasury market is tomorrow's refunding announcement.

Most economists are predicting a $36 billion package, unchanged from the May auctions, comprising $15 billion of three-year notes, $11 billion of 10-year notes, and $10 billion of 30-year bonds. But there is still speculation that the Treasury might cut the bond issue again.

Ward McCarthy, a managing director at Stone & McCarthy Research Associates in Princeton, N.J., expects a $1 billion cut in the size of the bone auction, to $9 billion, with $500 million added onto both the three-year and 10-year issues to keep the total package at $26 billion.

Mr. McCarthy said the Treasury was likely to reopen a previous issue likely to reopen a previous issue if it cut the size of the bond auction, because such a small issue would be vulnerable to manipulation. The current long bond, the 8% bonds due in November 2021, have been reopened twice already, but he said the Treasury probably would not issue more of that security because rates have fallen so much that new bonds would have to be sold at a considerable premium.

Instead, Mr. McCarthy suggested, the Treasury might reopen the 7 7/8 bonds of February 2021.

The September bond futures contract closed 1/32 higher at 104 28/32.

In the cash market, the 30-year 8% bond was 1/8 higher, at 106 14/32-106 18/32, to yield 4.83%.

Rates on Treasury bills were lower, with the three-month bill down one basis point at 3.18%, the six-month bill off two basis points at 3.26%, and the year bill two basis points lower at 3.46%.

Treasury Market Yields

Prev. Prev.

Monday Week Month

3-Month Bill 3.22 3.25 3.28

6-Month Bill 3.34 3.35 3.39

1-Year Bill 3.59 3.57 3.66

2-Year Note 4.38 4.22 4.43

3-Year Note 4.83 4.66 4.95

5-Year Note 5.81 5.63 5.95

7-Year Note 6.26 6.15 6.43

10-Year Note 6.70 6.66 6.88

15-Year Bond 7.05 7.03 7.25

30-Year Bond 7.44 7.51 7.61

Source: Cantor, Fitzgerald/Tolerate

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