The word of the week for North American investors is trade.

This Wednesday features the long-awaited U.S. congressional vote on the North American' Free Trade Agreement. The accord has become a touchstone issue for President Clinton's year-old administration.

Treasury market participants have thus far paid a moderate amount of attention to Nafta, but market observers interviewed on Friday agreed that the treaty, which will create a free trade zone between Mexico, Canada, and the United States, will have some important implications for the market.

"Nafta will have significant long-term effects on the market, and the vote is extremely important," said Michael Strauss, chief economist at Yamaichi International Inc.

The real issue is inflation. Treasury market players believe that with the removal of trade tariffs with neighboring countries, the prices of many goods will decline. Therefore, most bond market enthusiasts are backing the treaty.

A "no" vote on Nafta would have negative implications for the U.S. bond market because of the consequences for inflation. High tariffs and less competitive pricing would be harbingers of inflation and protectionism in North America.

The implications of a rejection of Nafta are clearly more political than economic in that it would weaken President Clinton's political stature in the upcoming General Agreement on Tariffs and Trade negotiations and in negotiations with Congress on health-care reform.

"Nafta is a bellwether of attitude"' said Samuel Kahan, chief economist at Fuji Securities Inc. in Chicago. "If it doesn't pass, it would be a sign post for protectionist sentiment."

A "no" vote will probably not unleash a violent sell-off in the Treasury market. But market economists argue that failure of global trade accords and of administration attempts to cut the budget deficit through health-care reform may make U.S. government securities less attractive to foreign investors.

Tony Cresceni, head of fixed-income at Miller, Tabak, Hirsch & Co., believes that a liberalization of trade will lead to expanding markets, while limits on trade result in capital flows out of North American countries. "I fear that failure of treaties like Nafta and GATT will not only boost world inflation but also reduce global investment and capital flows," Cresceni said.

The Nafta vote is still too close to call. Late Friday, U.S. Treasury Secretary Lloyd Bentsen said the treaty was within 10 votes of victory in the House, and will have a majority when the final vote is cast Nov. 17.

In the short term, Treasury market participants expect little more than a range trade this week until the market gets fresh news on the economy and the word on the Nafta vote.

On the fundamental front, this week's barrage of economic releases includes industrial production, business inventories, housing starts, merchandise trade, and the Philadelphia Federal Reserve's survey of manufacturing activity.

Omnipresent signs of growth in the economy have put fixed-income investors on the defensive in recent weeks and placed the spotlight on every forthcoming piece of economic data - even ones that historically have held little significance for Treasuries, observers said. Therefore, the market is vulnerable to hints of strength in the economy this week.

Friday Market Activity

Treasury market prices ended higher Friday despite some damning evidence that the U.S. economy is improving.

The 30-year bond ended up more than 3/4 of a point Friday, to yield 6.14%.

Market participants interpreted the bounce in prices as a correction, following the recent backup in rates that saw the 30-year bond surge nearly 50 basis points in the last month. A drop in the Commodity Research Bureau's index of commodity prices was a supporting factor.

Traders said market players got caught short Friday morning as Treasury prices fell in reaction to a surprisingly high jump in retail sales. Traders also reported some bottom fishing as accounts took advantage of attractive yield levels brought on by the market's sell-off in response to an unexpectedly large increase in retail sales.

Healthy auto sales helped boost retail sales 1. 5% in October to a seasonally adjusted $177.32 billion, the largest increase since April, the Commerce Department said, noting that the October increase was the seventh in a row. Excluding autos, sale rose 0.9% in October.

"The report showed that sales are still up very strongly and bode well for fourth-quarter growth" of gross domestic product, said Brian S. Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson.

Economists agreed that accelerated consumer spending activity, put together with other signs of strength in the economy will continue to pose problems for the fixed-income markets. Wesbury said the October retail sales figures, coupled with a 2.8% growth rate on consumer prices, may have set an interest rate floor in the bond market.

"I think 6% is the floor for the long bond," Wesbury said. "At this point it would take a dramatic turnaround in the economy or huge drop in commodity prices to push the bond below 6%."

In futures, the December contract ended up 109/32 to 117.02.

In the cash markets, the 37/8% two-year note was quoted late Friday up 3/32 at 99.18-99.19 to yield 4.09%. The 43/4% five-year note ended Up 9/32 at 98.27-99.29 to yield 5.00%. The 5 1/4% 10-year note was up 26/32 at 100.21-100.25 to yield 5.64%, and the 6 1/4% 30-year bond was Up 26/32 at 101.11-101.15 to yield 6.14%.

The three-month Treasury bill was down one basis point at 3.11%. The six-month bill was down three basis points at 3.24%, and the year bill was down one basis point at 3.39%.Treasury Market Yields Prev. Prev. Friday Week Month3-month Bill 3.11 3.10 3.016-Month Bill 3.24 3.33 3.101-Year Bill 3.39 3 54 3.242-Year Note 4.09 4.15 3.773-Year Note 4.44 4.44 4.015-Year Note 5.00 5.09 4.577-Year Note 5.22 5.31 4.7210-Year Note 5.64 5.72 5.1530-Year Bond 6.14 6.20 5.78Source: Cantor, Fitzgerald/Telerate

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