Treasury notes and bonds closed with small gains yesterday after a choppy, eventful session featuring a pair of interest-rate cuts by the Federal Reserve and another lackluster refunding auction.

Lat in the day, the 30-year bond was up 1/8 to yield 7.99%, and at the short end, where supply pressures were less of a problem, notes were up as much as 1/4 point.

The market's earlier gains seemed to be threatened by the sloppy 10-year auction, but prices rebounded late in teh day when retail investors showed up to buy the securities in the secondary market.

Traders said the uncertainty in the Treasury market might be scaring investors away from bidding at auctions.

Prices moved higher all along the

Treasury Market Yields

Prev. Prev.

Wednesday Week Month

3-Month Bill 4.73 4.95 5.13

6-Month Bill 4.86 5.02 5.25

1-Year Bill 5.93 5.08 5.34

2-Year Note 5.61 5.69 5.92

3-Year Note 5.95 5.99 6.17

4-Year Note 6.05 6.14 6.35

5-Year Note 6.70 6.76 6.87

7-Year Note 7.14 7.14 7.24

10-Year Note 7.52 7.45 7.49

15-Year Bond 7.82 7.74 7.78

30-Year Bond 7.99 7.89 7.91

Source: Cantor, Fitzgerald/Telerate

yield curve early in the session when the Federal Reserve announced it had cut the discount rate 1/2 point to 4 1/2%.

Even though the market had been waiting for a discount rate cut since Friday, when the weak October jobs data were released, yesterday's move came as a surprise because traders and analysts had assumed the Federal Reserve would not alter monetary policy in the middle of a quarterly refunding.

The reduction in the discount rate set off a wave of prime rate cuts by banks. And later in the morning, the Fed signaled it was also lowering its funds target by adding reserves when funds were already below the target.

Analysts said the new fudns target was 4 3/4%, down 25 basis points from the 5% level set just a week earlier.

After the initial rally on the discount rate announcement, long-term Treasuries drifted off their highs as traders fretted about the second of this week's three refunding auctions, yesterday's sale of $12 billion of 10-year notes.

The market was particularly skittish because the first refunding auction, Tuesday's $14 billion of three-year notes, had been a disaster.

When the 10-year results were announced, they looked almost as bad as the statistics from the three-year sale, ,but the market confounded expectations by improving.

"The actual results were substantially higher in yield, and lower in price, then anticipated by most observers," said Stuart Richardson, manager of Paine Webber's U.S. Government Income Fund.

"Ordinarily one would expect such an auction to result in very weak trading," Mr. Richardson said. "In fact, just the reserve has occurred."

The new 10-year notes, which will bear a 7 1/2% coupon, came at an average yield of 7.53%. That was significantly higher than the 7.51% average the market expected.

And instead of a one-basis-point tail, the accepted bids trailed back three basis points, all the way to 7.56%, with bidders at the high getting 58% of what they had asked for.

But after briefly trading to 7.55% after the results were announced, the new 10-years began to improve, and by late yesterday, the issue was trading at 7.50%.

Traders said retail buyers had stayed away from the auction, causing the poor results, then rescued the market by coming in to buy after the results were announced.

They speculated that recent changes in the Treasury's auction regulations and the general undertainty about the economic outlook have made retail investors so nervous that they are unwilling to participate in auctions.

"Whenever there's uncertainty in the marketplace, people don't want to play," a note trader said. "You're had a lot of people let the Street buy the paper, and then afterwards, when they see it's holding up, they come in."

"There are a lot of unprecedented things right now," the trader add- ed. "The curve has never been t his steep."

Retail investors have many reasons to be wary, a coupon trader said, including low interest rates and new requirements in the wake of the Salomon scandal that require more disclosure of retail involvement in auctions.

If you buy Treasuries in the secondary market, "you don't have to confirm to the Fed, you're not going to get arrested from discussing your intent with a dealer," the trader said. "We've had customers say they're not going to bid at auctions anymore."

Another trader blamed the recent rules opening the bidding process to all broker-dealers. Retail investors probably expected the change would cause primary dealers to become less aggressive, and as a consequence, the investors have become more wary, he said.

Stephen Gallagher, a money market economist at Kidder, Peabody & Co., pointed out that even though the 10-year sales was sloppy, it was not as bad as the three-year auction.

Mr. Gallagher said that as the market adapts to the changes in bidding procedures, auction results might improve.

For today's 30-year sale, though, he expects bidding similar to that for today's 10-year, with an average around 8%. Late yesterday, the when-issued bond were bid at 7.98%.

Traders said the market's tone this morning will be set by the weekly jobless claims report.

Economists surveyed by The Bond Buyer on average expect a 24,000 increase, to 429,000, as claims rebound from their decline the previous week, which included Columbus Day.

The December bond future contract closed 3/16 higher, at 98 28/32.

In the cash market, the 30-year 8 1/8% bond was 3/16 higher, at 101 9/32-101 13/32, to yield 7.99%.

The 7 7/8% 10-year note rose 3/16, to 102 9/32-102 13/32, to yield 7.52%.

The when-issued three-year 6% note was up 1/4, at 100 1/32-100 4/32, to yield 5.95%, down from the 6% average at Tuesday's auction.

Rates on Treasury bills were lower, with the three-month bill down 14 basis points at 4.62%, the six-month bill off 12 basis points at 4.69%, and the year bill off 11 basis points at 4.71%.

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