The Treasury bond market played a waiting game yesterday as issues traded in a narrow range and participants spent their time positioning themselves for a possible Federal Reserve rate tightening today.

Economists' uncertainty over the outcome of today's Federal Open Market Committee meeting did not make traders' decisions an easier. Some economists forecast a 50-basis-point tightening today, while others say the Fed won't make any moves until Nov. 15.

"My guess is the consensus opinion is for no change in policy," said Alan D. Levenson, a money market economist at UBS Securities. "After tightening 175 basis points in nominal terms [since February], they're still waiting to see the effects of the tightening."

A UBS report noted, nevertheless, that "the Fed is now deemed to have fallen behind the inflation curve in its tightening process." If the Fed does tighten today and leapfrogs ahead of the curve, "the markets could respond positively in the short run, as they did following the Aug. 16 tightening," the report said.

A tightening today might also have the opposite effect, the UBS report said, with markets concluding "that tightening marks the beginning of a new rapid-fire series of moves designed to throttle growth decisively in order to flat-line inflation. In that event, market action of the last two weeks could become prologue, with further ratcheting up of the yield curve, [and] continued softness in the dollar."

Looking to immediate activity in today's market, Levenson said. "If the Fed says tighten, the market sells off and the yield curve flattens. If the Fed doesn't tighten, the market rallies and the yield curve steepens."

Activity in yesterday's market was thin, with players sticking largely to covering short positions ahead of the FOMC meeting. The benchmark 30-year Treasury bond was up 1/8 point in early trading but by midafternoon was down 6/32, where it closed to yield 7.79%.

One trader in New York City said his firm heard a rumor from Chicago of hedge-fund selling involving $100 million of Treasury securities, which may have contributed to the price drop.

Ken Sullivan, a 10-year note trader at the First National Bank of Chicago, said his desk saw no hedge fund selling, and he attributed yesterday's activity to "position squaring ahead of tomorrow's" FOMC meeting.

"Some final curve bets are being placed before tomorrow," Sullivan said. "I would characterize trading today, at best, as boring."

One economist convinced that the Fed will tighten today is Marilyn Schaja money market economist for Donaldson, Lufkin & Jenrette Securities Corp. The most recent industrial production and capacity utilization numbers, higher commodities prices, and a higher-than-expected producer price index for August "all will push the Fed to raise rates tomorrow," Schaja said.

Yesterday's report that existing home sales fell 1.8% in August from July was a "non-event," she said. The Conference Board's release today of its consumer, confidence survey may attract more attention, Schaja said, but she reiterated that "the overriding event is the FOMC meeting."

Sales of previously owned homes fell 1.8% in August to a seasonally adjusted annual rate of 3.90 million units, the National Association of Realtors reported.

But actual sales "remain strong" according to association president Robert Elrod. "Based on our forecasts, we are right on track toward finishing out the year with the second best on record for existing single-family home sales."

The Federal Home Loan Mortgage Co. also reported that the national average commitment rate for 30-year conventional fixed-rate mortgages fen to 8.51% in August from 8.62% in July.

As for Treasury yields, a Salomon Brothers report pointed out that the front end of the yield curve is near its steepest levels in the past 10 years. The 30-year benchmark bond, meanwhile, has moved into a 7.75% range and shows signs of going as high as 8% before the year is out.

The 10-year Treasury note was down 3/32 yesterday to yield 7.55%. The seven-year note was down 1/32 to yield 7.38%, and the five-year slipped 2/32 to yield 7.19%.

The yield on the three-month bill was down one basis point to 4.88%. The yield on the six-month bill was up one basis point to 5.41%, and the yield on the one-year rose two basis points to 5.89%.

The December Treasury bond futures contract closed unchanged yesterday at 99.09.Treasury Market Yields Previous Previous Monday Week Week3-Month Bill 4.88 4.69 4.666-Month Bill 5.41 5.23 5.031-Year Bill 5.89 5.77 5.552-Year Note 6.49 6.36 6.183-Year Note 6.77 6.66 6.455-Year Note 7.19 7.09 6.857-Year Note 7.38 7.30 7.0310-Year Note 7.55 7.47 7.2230-Year Bond 7.79 7.75 7.49Source: Cantor, Fitzgerald/Telerate

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