Short-term Treasury prices outperformed the rest of the market yesterday when the May new home sales report provided further evidence that the economic recovery is a weak one.

Late yesterday, the 30-year bond was up 1/8 and yielded 7.76%, while short-term and intermediate notes were up 1/8 to 1/4 point.

The price gains occurred in quiet trading, and participants said the activity was restrained because the market is waiting for Thursday's June employment report.

The bond market is hoping the Federal Reserve will loosen credit again to spur economic growth and it sees the June jobs data as the key factor in the Fed's decision.

The Federal Open Market Committee is meeting today and tomorrow, but analysis say Fed policy-makers are not likely to alter policy until they see the jobs data.

The unexpected decline in May home sales follows last week's May durable goods and jobles claims numbers, both of which were weaker than expected.

Economists said the weakness in yesterday's May new home sales report was troubling because housing is typically one of the first sectors to recover from a recession.

May new home sales fell 5.6% when the consensus forecast called for a 3.4% gain, and April's sales were revisited to a 2.7% decrease from the 1.3% gain reported last month.

May's decrease, the fourth in a row, left home sales at a 501,000 annual pace. This was the lowest level in eight months and well below the 667,000 rate recorded in January.

"This isn't the way the housing area is supposed to be behaving in the recovery," said Robert Dederick, chief economist at Northern Trust Co. "It's supposed to be a vibrant and a powerful leader of the expansion."

The decline in May home sales is "another item on the scales favoring that the Fed ease policy," Mr. Dederick said. "Unless the employment report bails the Fed out by being on the vigorous side, I would think the ease is there."

He said a vigorous employment report would show a gain of more than 150,000 in nonfarm payrolls. Most economists are expecting increases of 75,000 to 100,000 in June payrolls.

Mr. Dederic said some of the weakness in home sales in recent months was linked to the unusually robust gains in January and February, when intereset rates plunged. In effect, the surge early in the year borrowed from the strength in housing usually seen in the spring, he said.

Meanwhile, "interest rates are back down again, so that has to be encouraging," Mr. Dederick added.

As the short end outperformed the long end yesterday, the yield curve steepened. Late in the afternoon, the 30-year bond was yielding 296 basis points more than the two-year note, up from 289 late Friday.

The short end's strong showing was also evident in the Treasury's auctions of $23.2 billion of three- and six-month bills, which came to the lowest rates in 20 years.

The three-month bills were sold at an average rate of 3.59% and were bid at 3.56% late yesterday. The six-month bills were auctioned at an average rate of 3.66% and stood at 3.64% late yesterday.

Both issues "were very well received and are trading better into the close," a bill trader said.

The long end gave back its morning gains early yesterday afternoon, and a bond trader linked the losses to hedging by corporate dealers. About $950 million of corporate bonds were priced yesterday.

Early in the afternoon, "you began to get a sense of some of the corporate deals were hung up, and you saw some hedging come into the pit," the trader said, "That brought the marketg back down."

Later the long end rebounded, suggesting the corporate securities were being distributed and the dealers had taken their hedges off, he added.

The September bond futures contract closed 3/32 higher at 100 23/32.

In the cash market, the 30-year 8% bond was 1/8 higher, at 102 18/32-102 22/32, to yield 7.76%.

The 7 1/2% 10-year note rose 1/4, to 102 22/32-102 26/32, to yield 7.09%.

The three-year 5 7/8% note was up 5/32, at 101 15/32-101 17/32, to yield 5.29%.

In when-issued trading, the 5% two-year note was up 3/16, at 100 11/32-100 12/32, to yield 4.80%, and the five-year 6 3/8% note was up 1/4, at 100 13/32-100 15/32, to yield 6.26%. Both the issues will settle today.

Rates on Treasury bills were lower, with the three-month bill down eight basis points at 3.56%, the six-month bill off two basis points at 3.67%, and the year bill seven basis points lower at 3.88%.

Treasury Market Yields

Prev. Prev.

Monday Week Month

3-Month Bill 3.62 3.71 3.81

6-Month Bill 3.76 3.86 4.00

1-Year Bill 4.03 4.11 4.30

2-Year Note 4.80 5.00 5.25

3-Year Note 5.29 5.52 5.79

4-Year Note 6.27 6.44 6.65

5-Year Note 6.26 6.45 6.66

7-Year Note 6.68 6.87 7.01

10-Year Note 7.09 7.27 7.36

15-Year Bond 7.40 7.55 7.66

30-Year Bond 7.76 7.84 7.88

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