Treasury coupon prices languished at levels slightly below Friday's closes for most of the session yesterday, but the long bond managed a small rally in the afternoon when an administration official echoed earlier remarks by Treasury Secretary Nicholas Brady about reducing long-term debt issues.

The 30-year bond closed 1/4 point higher, where it yielded 7.74%.

The gains occurred after Deputy Treasury Secretary John Robson said the Treasury was considering limiting long-term issuance.

His remark resembled recent comments by Mr. Brady, and traders said it was this repetition that mattered.

"The more [administration officials] talk about it, the more people realize it is a serious thought," a government note trader said. "People are afraid to be short bonds in case that happens."

Treasury Market Yields

Prev. Prev.

Monday Week Month

3-Month Bill 4.24 4.23 4.69

6-Month Bill 4.29 4.28 4.78

1-Year Bill 4.41 4.39 4.86

2-Year Note 5.04 5.04 5.51

3-Year Note 5.37 5.42 5.86

4-Year Note 5.48 5.55 5.96

5-Year Note 6.25 6.22 6.55

7-Year Note 6.71 6.71 6.95

10-Year Note 7.17 7.21 7.33

15-Year Bond 7.51 7.53 7.67

30-Year Bond 7.74 7.78 7.84

Source: Cantor, Fitzgerald/Telerate

Traders said activity was amazingly quiet yesterday as the usual Monday torpor was reinforced by the market's wait for another ease by the Federal Reserve.

Most participants expect at 1/2-point cut in the discout rate to 4% and a 1/4-point cut in the funds rate to 4 1/4%.

Some traders said they expect the discount rate cut to be announced this morning, even though Fed policymakers will only just have begun their two-day Federal Open Market Committee meeting. Others wonder if the Fed will stage a repeat of last December's mid-afternoon announcement of a discount rate cut.

If the Fed has not acted by mid-day tomorrow, traders agree the market will back up going into the Treasury's auctions of $13.5 billion of two-year notes that afternoon and $9 billion of five-year notes Thursday afternoon.

A coupon note trader said the two-year could easily get back to 5 1/8% if the Fed failed to ease; late yesterday, the two-year notes were bid at 5.07% in when-issued trading. And another short-term trader thought a 5 1/4% coupon was a possibility.

The market ignored the weaker-than-expected November industrial production report yesterday morning, even though the number seemed to provide further proof that the Fed should cut rates.

Last month's industrial product fell 0.4%, compared to the 0.1% decline predicted by economists. And November capacity utilization fell to 79.1%, the lowest reading since May.

The decline was led by a 5.8% drop in auto and truck production. Joan Schneider, a money market analyst at Continental Illinois, said a strike at Caterpillar Manufacturing had added to the decrease in November output.

"Today's number represents the fourth month in which there has been no net gain in industrial production, showing the continued weakness in the economy," she said.

Also yesterday, the Treasury sold $20.5 billion of three- and six-month bills. The three-month bills came at an average rate of 4.14%, down from the 4.21% level at the previous week's auction, and the six-months came at 4.19%, down from 4.20%.

The March bond futures contract closed 7/32 higher at 100 22/32.

In the cash market, the 30-year 8% bond was 7/32 lower, at 102 25/32-102 4/32, to yield 7.74%.

The 7 1/2% 10-year note rose 1/8, to 102 4/32-102 8/32, to yield 7.17%.

The three-year 6% note was unchanged at 101 19/32-101 21/32 to yield 5.37%.

In when-issued trading, the five-year notes were offered at 6.25%.

Rates on Treasury bills were mixed, with the three-month bill unchanged at 4.15%, the six-month bill down two basis points at 4.16%, and the year bill one basis point lower at 4.22%.

Nikko Gives Forecast

The protracted weakness in the U.S. economy means the eventual recovery may be stronger than most people expect, Robert Brusca, chief economist for the Nikko Security Company International Inc., said yesterday.

"This should be a pretty good, solid recovery once it comes," Mr. Brusca said.

He believes the U.S. economy never emerged from the recession that began in the summer of 1990, although it experienced a "false recovery" last spring.

That means that as of December the downturn is entering its 17th month, second in length only to the Great Depression, he said.

The unusually long duration of this contraction is one of many statistics showing it was a severe as opposed to shallow recession, which means the eventual recovery will be robust, Mr. Brusca said.

"Economists were forecasting a weak recovery because they expected a shallow recession," Mr. Brusca said. "This recession was not short; it was not shallow."

He expects further Fed easing to result in a strong rebound starting in the second quarter, after two more quarters of negative growth.

Mr. Brusca is forecasting a 1.4% decline in fourth-quarter gross domestic product and a 1.6% decrease in the first quarter of next year, followed by a dramatic 5.0% gain in the second quarter, a 5.5% increase in the third quarter, and a 4.0% rise in the fourth quarter.

Fed funds will bottom out at 3 3/4% during the first quarter, down from the current 4 1/2% level, and the long bond will get as low as 7% during that same period, he said.

Mr. Brusca sees the recovery losing steam in the long term. After three or four quarters of strong growth, the economy will ease off to a 2.5% growth rate because of structural problems like the low personal savings rate, he added.

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