U.S. government securities continued their slide yesterday as market participants reevaluated positions amid a growing sense that another Federal Reserve tightening is near. Prices on the benchmark 30-year Treasury bond fell more than 1/4 point to yield 7.79%, as hedge funds and commodity funds took advantage of every price uptick to sell securities.

The December futures contract closed down 1/4 point at 99.05. "There's a reevaluation going on, given recent data about the inflation outlook and the outlook for a near-term move" by the Fed, said Donglas Schindewolf, money market economist at Smith Barney Inc. "Most people were comfortable until recently that the Fed would be on hold for a while. Now that comfort level has been reduced. Activity late last week and so far this week is reflecting adjustments to portfolios to accommodate that change in risk profile."

With little in the way of hard economic news being released this week and players searching for guidance, several factors are contributing to the market's bearish tone.

Yesterday, the rising price of gold and statements from U.S. trade representative Mickey Cantor about the difficult road ahead in trade talks between the United States and Japan helped spark another round of selling 6f Treasury securities.

Comments on the likelihood of another Fed move by Wayne Angell, a former Fed governor and current chief economist at Bear Steams & Co., as well as by economists at Goldman, Sachs & Co., added fuel m the fire.

Fed chairman Alan Greenspan has historically viewed gold prices as a good proxy of inflationary pressures. Yesterday, gold nearly hit the psychologically important $400 per ounce mark yesterday before settling down to about $395.

Indications from U.S. officials that trade sanctions may be imposed on Japan if an agreement is not reached by the end of September have generated fears of a trade war between the two nations and the deleterious effect it would have on the dollar.

In late New York trading yesterday, the dollar was quoted at 97.75 Japanese yen and 1.5462 German marks, compared with 97.60 yen and 1.5510 marks the previous day.

On the heels of the surprisingly strong readings in the August consumer and producer price indexes and industrial production data in recent weeks, the latest developments exacerbated already swelling inflation fears. As a result, market sentiment has shifted to a more immediate focus on the potential for another tightening of monetary policy by the Federal Reserve.

The Fed's next Open Market Committee meeting is scheduled for Sept. 27, with the Nov. 15 meeting to follow. Earlier in the month, many players were expecting the Fed to hold off on another policy move until after next Tuesday's FOMC meeting, possibly until the November gathering. But now many market traders and analysts are expecting a move next week, or shortly thereafter.

"We believed they wouldn't have enough data to tighten on Tuesday, but with the capacity utilization number it's possible they could go on Tuesday with a 50-basis-point tightening on fed funds," said Waldo T. Best, economist at Barclays de Zoete Wedd Securities Inc. "They can't wait until November and still cream the same perception that they're moving in a pre-emptive manner. There is a need for the Fed to maintain credibility."

Some market players are already pricing a Fed tightening into their trades, Best said, adding that yields will move toward 8% on the long bend if the Fed does not act next week.

Several economists agreed with Best that the market might be setting itself up for a disappointment if players are convinced that the Fed will move on Tuesday.

"Even though the probability of them moving this week has moved up, lt's still a below 50% probability," said Schindewolf, who also thinks the tightening -- if it does occur will be 25 basis points, rather than more widely assumed 50 basis points.

"I think the Fed will adjust the funds rate in line with any upward creep of inflation, and I have a hard time envisioning a half-point rise in the inflation rate between now and November, much less between now and next Tuesday," he said.

Carol Stone, senior economist at Nomura Securities, agreed that players expecting a Fed tightening in the near term may be surprised.

"Our view is that the Fed may well act between now and the end of the year, but it's much more likely to come after they've seen employment and retail sales numbers for September," Stone said.

The September employment report will be released on Oct. 7, with the retail sales figures set to be issued a week later.

Meanwhile, the government reported yesterday that housing starts increased 2.1% in August to a seasonally adjusted rate of 1.44 million from a revised 1.35 million in July. The figure outstripped expectations of most economists, who were calling for a slight drop. A 28.5% rise in multifamily housing construction drove the increase, as single-family starts dipped 2.7%.

Economists downplayed the significance of the housing report, particularly in light of the overwhelming influence of multifamily starts, and the market generally shrugged off the news, traders said.

Separately, the U,S. Treasury said it will sell $17.25 billion of two-year notes on Sept. 27 and $11.0 billion of five-year notes the following day to raise $4.8 billion of new money and refund $23.5 billion of securities that mature on Sept. 30.

Corporate Securities

It was a light day in corporate securities, with only one new issue priced in the primary market.

In the secondary market, spreads of investment-grade bonds widened by 1/8 to 1/4 of a point in sympathy with Treasuries while high-yield bonds were mostly unchanged in light trading. Spreads on the outstanding bonds of Aetna Life and Casualty Co. widened by three to five basis points on news that Moody's Investors Service lowered its rating on the firm's senior debt to A2 from A1 but traders said the downgrade had been widely expected.

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