Bills and short-term notes led the rest of the Treasury market higher yesterday as anticipation of a decline in the November nonfarm payroll number due out Friday encouraged hopes for another easing by the Federal Reserve.

By late in the afternoon, shorterm notes were up 1/8 point or more, while the 30-year bond closed 1/16 higher and yielded 7.88%.

"The front end's on fire," a government bond traders said.

As traders became aware that most economists expect a decline in November payrolls, there has been "growing anticipation that the Fed could very well eae Friday," said Kevin Loga, chief economist at Swiss Bank Corp. "And if they don't ease Friday, they'll ease at the Federal Open Market Committee" that begins Dec. 17.

Economists surveyed by The Bond Buyer on average expect a 40,000 decline in November nonfarm payrolls. Many also say October's 1,000-job decrease will be revised lower.

That kind of November decline would probably bring another 25-basis point cut in the funds rate, to 4 1/2%, economists say.

But Anthony Karydakis, senior financial economist at the First National Bank of Chicago, said the price action at the front end suggested traders were considering the possibility the Fed would move the fund rate 50 basis points lower to 4 1/4%.

The two-year note has been yielding about 75 basis points more than the funds rate recently, Mr. Karydakis said. With the two-year closing at 5.26% yesterday, a Fed move to 4 1/2% "has already been priced in," he said.

The front end was also encouraged by a wire service report at midday that an unnamed senior Fed official said the Fed was concerned about the sluggish economy and still had room to move rates lower.

That story offset an earlier comment by another Fed official, also nameless, on CNBC television that current Fed policy was "unbiased," instead of tilting toward another ease as traders believed.

Long-term prices got some assistance from a decline in oil prices. The January West Texas Intermediate contract fell 57 cents yesterday, to $20.51 a barrel, and late in the day traders reported hearing rumors of a coup attempt in Iraq.

The market paid little attention to yesterday's indicators, which were a mixed bag for bonds.

The 0.1% increase in October leading indicators was in line with market expectations and follows September's 0.1% decline and August's flat index.

"We basically have three consecutive months of near-stagnation," said Matthew Alexy, a money market economist at Deutsche Bank Government Securities.

Thaat is the worst three-month performance so far this year and contradicts the notion that the economy is coming out of recession, he said.

But the report on October home sales gave the market a new, up-beat look at the housing sector.

October sales rose only 2.2%, which was well below the 4.3% gain the market expected. But much of September's big decline was revised away, and September now stands as a 4.9% drop instead of the 12.9% plunge originally reported.

Economists said the improvement suggests lower mortgage rates are finally luring buyers to the housing market.

Even though the home sales figure looked like bad news for the bond market, a note trader called it a "non-event."

Short-term prices fell briefly when the indicator was released, "but there were people there to buy on dips," the trader said.

A futures contract trader argued the market was on hold ahead of today's revision to the third-quarter gross national product report.

If third-quarter GNP is revised sharply higher from last month's estimate of a 2.4% increase, the Treasury market could sell off sharply, he said.

Economists surveyed by The Bond Buyer on average expect the revised GNP report to show a 2.9% increase. But economists warn that the number could be a complete surprise, since the report will incorporate a benchmark revision and changes to take 1990 census figures into account.

Some traders argued that the changes being made to the GNP series were so substantial, participants would be wary about trading off the headlines. "They're going to wait to see what economists have to say," a note trader said.

The March bond futures contract closed 9/32 higher at 99 14/32.

In the cash market, the 30-year 8% bond was 1/16 higher, at 101 2/32 - 101 6/32, to yield 7.89%.

The 7 1/2% 10-year note rose 7/32, to 101 16/32 - 101 20/32, to yield 7.26%.

The three-year 6% note was up 5/32, at 100 31/32-101 1/32, to yield 5.61%.

Rates on Treasury bills were lower, with the three-month bill down three basis points at 4.36%, the six-month bill off four basis points at 4.35%, and the year bill three basis points lower at 4.41%.

Treasury Market Yields

Prev. Prev.

Tuesday Week Month

3-Month Bill 4.46 4.54 4.87

6-Month Bill 4.50 4.56 4.88

1-Year Bill 4.61 4.72 5.05

2-Year Note 5.26 5.45 5.69

3-Year Note 5.61 5.79 6.01

4-Year Note 5.72 5.88 6.13

5-Year Note 6.36 6.54 6.78

7-Year Note 6.81 7.00 7.19

10-Year Note 7.26 7.40 7.54

15-Year Bond 7.62 7.71 7.86

30-Year Bond 7.89 7.94 8.02

Source: Cantor, Fitzgerald/Tolerate

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