Wednesday's dramatic developments in the European financial markets left Treasury participants wary yesterday, and prices moved listlessly back and forth within narrow ranges.

Late in the day, prices were narrowly mixed, with the 30-year bond up 1/32 to yield 7.32%.

The bond market, ignored some mostly favorable economic news, including a widening in the July trade deficit and a small increase in jobless claims, and continued to focus on world events.

On Wednesday, Great Britain and Italy temporarily withdrew their currencies from the Exchange Rate Mechanism, which links the major European currencies. The currency crisis, a major blow to Europe's quest for economic union, roiled financial markets all over the world.

Yesterday, the volatility in the foreign exchange markets subsided, although many economists said it was just a temporary lull ahead of this weekend's French referendum and meeting of the Group of Seven industrialized nations.

Kevin Logan, chief economist at Swiss Bank Corp. in New York, said that even though Europe's currency problems were not over, "it does appear the market's sensitivity to what was going on over there has diminished."

Mr. Logan said the volatile trading Wednesday in the Treasury market partly reflected confusion over what was happening in Europe and what it meant for Treasury prices, and that confusion has now been alleviated. "And the stability of the dollar is helping," he said.

"There are also expectations that when the. dust finally settles, we might see lower interest rates in Europe," Mr. Logan added.

Lower rates in Europe would bolster the dollar by lessening the interest-rate differential between U.S. and foreign securities, and would also appear to increase the chances for another easing by the Federal Reserve.

Traders said flows were light yesterday and they predicted the market would remain quiet through today as participants wait for the Group of Seven meeting and the results of Sunday's French vote on the Maastricht treaty.

Some traders argued yesterday that the vote in France will be an anticlimax after Wednesday's turmoil.

"Maastricht doesn't matter," the head of a Treasury trading desk said. "The main event already happened, they've broken the ERM."

He predicted the Treasury market would begin to turn its focus back to U.S. economic news and to next week's auctions of two- and five-year notes. Caution may remain a key ingredient, though, since many domestic investors are sitting on big profits and will be reluctant to risk them so close to yearend, the desk head added.

But Astrid Adolfson, an economist at McCarthy, Crisanti & Maffei Inc., said European markets will endure further ups and downs for at least another week. As long as that volatility continues, the U.S. yield curve will remain steep, since the uncertainty hurts the long end but creates flight-to-quality buying at the short end, she said.

"The weak sisters in the ERM are still trying to find a level at which their currency would be pegged back to ERM," Ms. Adolfson said. "I don't think you can realign those currencies that quickly, and I think you'll have more volatility" while the realignment process goes on.

She pointed out that the countries with weak currencies face the difficult task of altering domestic policies to bring them into line with the rest of the European Community. For example, Italy announced budget cuts yesterday.

The market ignored yesterday's economic numbers, which were variations on the theme of sluggish economic growth.

The Labor Department said new claims for unemployment insurance rose 6,000 in the week ended Sept. 5, to 400,000. That gain was in line with market expectations, especially if the 15,000 workers who filed for federal rather than state benefits were taken into account.

The July trade deficit rose to $7.8 billion from a revised $6.73 billion gap in June, when economists had predicted a deficit of about $7 billion. The bigger deficit occurred as exports tumbled and imports rose modestly. Cynthia Latta, a financial economist at Dri/McGraw-Hill, said the change reflected the muted recovery in the United States and the contracting economies of its trading partners.

The Philadelphia Fed's business outlook survey for September was a little more upbeat. The diffusion index was positive for the seventh month in a row, rising to 14.7 from 12.5 in August.

The market was similarly unimpressed with the money supply data yesterday afternoon.

A spokesman for the Federal Reserve Bank of New York reported at the bank's weekly press briefing yesterday that: The nation's MI money supply rose $4.3 billion to $983.3 billion in the week ended Sept. 7; the broader M2 aggregate increased $4.7 billion, to $3.5 trillion; and M3 fell $6.5 billion, to $4.2 trillion, in the same period.

Today's trading is likely to be even quieter than yesterday's, a bill trader said, because many participants have already gotten positioned for the weekend.

"The attitude of the New York market seems to be they don't want to be short anything inside of two years" going into the weekend, the trader said.

He predicted the short end would suffer early next week, though, as dealers try to lighten up ahead of the two- and five-year note auctions.

Yesterday, however, the demand for short-term paper resulted in a successful year bill auction. The $13.75 billion of year bills came at an average rate of 3.02%, the lowest since early 1963.

The December bond futures contract closed 2/32 higher at 105 13/32.

In the cash market, the 7 1/4% 30-year bond was 1/32 higher, at 98 30/32-99 2/32, to yield 7.32%.

The 6 3/8% 10-year note was unchanged, at 99 26/32-99 30/32, to yield 6.38%.

The three-year 4 5/8% note was down 1/32, at 100 24/32-100 26/32, to yield 4.32%.

In when-issued trading. the two-year note to be auctioned Tuesday was bid at 3.89% and the five-year note to be sold Wednesday was offered at 5.41 %.

Rates on Treasury bills were little changed, with the three-month bill steady at 2.90%, the six-month bill up one basis point at 2.93%, and the year bill two basis points higher at 3.03%.

In other news, the New York Fed reported the federal funds rate averaged 3.28% for the week ended Wednesday, up from 3.09% the previous week. !!!BEGIN TABLE

Treasury Market Yields

Prev. Prev.

Thursday Week Month

3-Month Bill 2.93 2.95 3.13

6-Month Bill 2.99 3.00 3.22

1-Year Bill 3.11 3.15 3.38

2-Year Note 3.81 3.81 4.02

3-Year Note 4.32 4.30 4.53

5-Year Note 5.37 5.24 5.41

7-Year Note 5.90 5.80 5.96

10-Year Note 6.38 6.30 6.46

30-Year Bond 7.32 7.24 7.31

Source: Cantor, Fitzgerald/Telerate

Treasury Sells One-year Bills at 3.02% Rate

WASHINGTON - The Treasury yesterday sold $13.79 billion of one-year bills at an average discount rate of 3.02%, down from 3.28% in the previous acution on August 20 and the lowest since the 3.02% on Jan. 9, 1963.

The coupon equivalent was 3.13%. The average price was 96.946.

The Treasury received $41.06 billion of tenders for the bills and accepted $13.79 billion, including $401 million offered noncompetitively from the public and $2.93 billion from Federal Reserve Banks for themselves and as agents of foreign and international monetary authorities, all at the average. The New York Federal Reserve District applied for $38.12 billion of the bills and received $13.03 billion.

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