Treasury prices ended narrowly mixed yesterday as some nervousness developed ahead of today's June employment report, which will set the market's tone for the coming month.

Late yesterday, the 30-year bond was 1/16 lower to yield 6.67%. The short end held onto its earlier gains, though, with the two-year note closing 1/16 higher to yield 3.97%.

The slight sell-off at the long end occurred as the prices of gold and other commodities surged. But traders said that if there was a connection between the two events, it was that the commodity price gains provided investors with an excuse to sell securities ahead of the employment report.

The Commodity Research Bureau index closed 2.61 points higher at 209.73, with the bulk of the increases coming in grains and metals. Spot gold was quoted at $386.00 an ounce late yesterday, up $8.60 from Wednesday's close.

Traders say the bond market's lofty price levels and high expectations for the jobs statistics leave it vulnerable to a setback today.

Anticipation of a friendly employment report has been one element fueling the market's gains this week. The 30-year bond closed at 6.66% Monday and Tuesday, which marks the lowest closing yield since the Treasury began auctioning long bonds on a regular basis in 1977, and it was still hovering close to that record level yesterday.

Twenty-five economists surveyed by The Bond Buyer on average expect 130,000 jobs will be added to June nonfarm payrolls, which would be down from the 209,000 May increase and the 216.000 April gain.

But over the last week, the bond market has focused on reports of economists who were lowering their forecasts, and traders said that if the consensus forecast is accurate, the market will be disappointed.

"If it's up 130,000, the market's going down," the head of a Treasury trading desk said.

Traders predicted that an increase of about 100,000 jobs would be neutral for the bond market, while an increase of 50,000 or less would trigger a rally.

If the number is weaker than expected, traders said the short end of the market will perform best, resulting in a steeper yield curve, because the report will provide yet another argument against any tightening by the Federal Reserve.

Treasury prices were volatile within narrow price ranges yesterday.

The short end began to improve in early New York trading on a rumor that the Fed's Board of Governors was holding an emergency meeting today. The Fed quashed that rumor, pointing out that today's gathering is just a normal Monday meeting that has been rescheduled because of the holiday.

But the purchasing managers' index provided the market with a reason to hold onto its earlier gains.

The National Association of Purchasing Management said its June index fell to 48.3% from the 51.1% May reading. Economists had expected a smaller slide, to 50.2%.

That 48.3% reading was the lowest since December 1991, the association said. The index's production, employment, new orders, vendor delivery, and export components posted declines, while commodity prices showed a small increase.

According to the association, a reading below 50% shows the manufacturing sector is slowing. But as long as the index comes in above 44.5%, it shows the overall economy is still growing.

Kathleen Stephansen, a senior economist at Donaldson, Lufkin & Jenrette Securities Corp., said the report was "disappointing."

"It's not news that the manufacturing sector has been lagging, but now it's looking as though it's contracting. and that's somewhat worrisome," she said.

Stephansen said the purchasing managers' report suggests subdued gross domestic product growth during the second quarter. She had been estimating a 1.5% second-quarter growth rate, down from the 3% she expected earlier this year, but said that in light of recent statistics, second-quarter GDP may come in even lower than 1.5%.

"Things don't look as strong as they used to," said Steven Ricchiuto, chief economist at Barclays de Zoete Wedd Securities.

Ricchiuto blamed the economy's waverings on the uncertainty produced by the Clinton administration's economic program, and added that even though the uncertainty will slow the economy, it is not likely to push the United States into another downturn.

Early in the session yesterday, prices dipped briefly after the Labor Department reported that new claims for unemployment insurance fell 11,000 to 340,000 in the week ended June 26, from a revised 351,000 total the previous week. The consensus forecast called for claims to come in at 347,000.

Michael Strauss, chief economist at Yamaichi International (America), said even though the decline erased the previous week's 8,000 increase, jobless claims "still seem to be gravitating around the same level."

Also yesterday, the German Bundesbank announced that it was cutting its discount and Lombard rates. The discount rate was lowered to 6.75% from 7.25% and the Lombard rate to 8.25% from 8.50%.

The Treasury market ignored the rate cuts and analysts said the Bundesbank's easing was widely anticipated and was probably already accounted for in Treasury price levels.

In other news, the Federal Reserve Bank of New York reported that the nation's M1 money supply rose $4.8 billion to $1.1 trillion in the week ended June 21; the broader M2 aggregate dropped $1 billion, to $3.5 trillion, and M3 fell $6.4 billion, to $4.2 trillion.

The September bond futures contract closed 1/32 lower at 113 29/32.

In the cash market, the 7 1/8% 30-year bond was 2/32 lower, at 105 21/32- 105 23/32, to yield 6.67%.

The 6 1/4% 10-year note fell 2/32, to 103 13/32- 103 15/32, to yield 5.77%.

The three-year 4 1/4% note was up 2/32, at 99 25/32-99 27/32, to yield 4.30%.

Rates on Treasury bills were lower, with the three-month bill down three basis points at 2.99%, the six-month bill off two basis points at 3.11 %, and the year bill four basis points lower at 3.28%.

In other news, the New York Fed reported that the federal funds rate averaged 3.13% for the week ended Wednesday, down from 3% the previous week.Treasury Market Yields Prev. Prev. Thursday Week Month3-Month Bill 3.03 3.15 3.086-Month Bill 3.18 3.27 3.241-Year Bill 3.38 3.49 3.502-Year Note 3.97 4.14 4.123-Year Note 4.30 4.43 4.495-Year Note 5.03 5.16 5.217-Year Note 5.41 5.50 5.6110-Year Note 5.77 5.86 6.0030-Year Bond 6.67 6.73 6.85Source: Cantor, Fitzgerald/Telerate

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