Short-term notes outpaced the rest of the Treasury market yesterday, posting small gains on a newspaper story that supported expectations that the Fed will ease monetary policy again.

But the improvement at the short end occurred amid very thin trading, and participants described the session as another lifeless summer Monday in the bond market.

By late in the day, the 30-year bond was 1/32 lower to yield 8.38%, while short-term notes were 1/32 to 1/16 higher.

Short-term prices began to rise overnight in Tokyo after The Wall Street Journal yesterday reported that the slow growth in money supply was beginning to worry Fed officials.

According to the article, one "Fed policy maker" said weak M2 growth was making him "increasingly nervous."

Hopes that sluggish money supply growth would force the Fed to ease again have been the talk of the bond market over the past few weeks, but most of the Fed governors who commented publicly said they were not alarmed by the situation.

Economists said the story was marginally favorable for the bond market, but they maintain the Fed will not alter policy just because M2 growth is slow.

"The message is that yes, money

Treasury Market Yields

Prev. Prev.

Monday Week Month

3-Month Bill 5.73 5.71 5.73

6-Month Bill 5.93 5.99 5.95

1-Year Bill 6.20 6.24 6.35

2-Year Note 6.82 6.85 6.96

3-Year Note 7.18 7.28 7.33

4-Year Note 7.31 7.43 7.50

5-Year Note 7.79 7.90 7.92

7-Year Note 8.04 8.13 8.13

10-Year Note 8.19 8.27 8.24

20-Year Bond 8.34 8.41 8.43

30-Year Bond 8.38 8.46 8.43

Source: Cantor, Fitzgeraid/Telerate

supply is a concern, but unless the weakness is seen elsewhere in the economy, it's not enough to spur a change in policy," said Henry Engler, an economist at Chemical Securities.

Mr. Engler said it was possible that M2 is soft for other reasons, such as the continued shrinkage in the savings and loan industry or low demand for bank loans.

"There are a number of things that could be influencing money growth and as long as the Fed is comfortable with the economic numbers they're seeing, they're unlikely to react to the slowdown in M2," he said.

Frederick Leiner, a market strategist at Continental Illinois National Bank & Trust, said the story was not a surprise, bu "it didn't hurt the short end to be reminded of the fact that money supply growth is weak and a matter of concern for some Federal Open Market Committee members."

Mr. Leiner agreed, though, that the Fed would not act to loosen credit on the M2 numbers alone. "I think the Fed would be reluctant to ease unless there was some confirmation, such as a weaker economy," he said.

The market gets more numbers today and tomorrow, but Mr. Leiner said he thought Treasury prices would remain firm until the end of the week, when the first July indicators will be reported.

Market participants are bullish because they believe the recovery is weak and inflation is under control, he said.

"Right now, people feel that as soon as supply is over, they should be long," Mr. Leiner said. "It's conceivable the data we get Thursday and Friday could alter people's perception of how the economy is doing."

Earlier yesterday, the long end traded off briefly when the Commodity Research Bureau index skyrocketed.

The jump in commodity prices on the surface appeared threatening for the bond market, but traders pointed out that the move was all in grains, while oil prices feel yesterday.

Mr. Leiner said the CRB index is still far closer to its lows than its highs. And another measure of commodity prices, the Journal of Commerce index, is going in the opposite direction, he said.

The market seemed to lose interest in commodity prices during the afternoon as the CRB index came off its highs. It closed at 213.68, down from its high of 215.30, but still up 1.89 points on the day.

The market ignored the June personal income and spending report. Both income and spending rose 0.5% last month, in line with the consensus forecast.

The September bond futures contract closed 5/32 lower, at 94-12/32.

In the cash market, the 30-year 8-1/8% bond was 1/32 lower, at 97 - 91-4/32, to yield 8.38%.

The 8% 10-year note was unchanged at 98-19/32 - 99-17/32, to yield 7.18%.

In when-issued trading, the 6-7/8% two-year note was 1/32 higher, at 100-2/32 - 100-3/32, to yield 6.82% and the 7-7/8% five-year note was up 1/32, at 100-8/32 - 100-10/32, to yield 7.79%.

Rates on Treasury bills were mixed, with the three-month bill steady at 5.58%, the six-month bill unchanged at 5.69%, and the year bill two basis points lower at 5.85%.

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