The 30-year Treasury bond on Friday nearly breached the psychologically important 6.5% yield level, buoyed by a combination of weaker-than expected economic news and light trading activity, economists and traders said.

The 30-year bond finished the afternoon 1/8 point higher in price to yield 6.538%. the lowest yield since the goverment began holding regular 30-year bond auctions in 1977, economists say. Most other securities ended unchanged to slightly higher.

The bond's New York close fell short of its mid-afternoon high, where the long bond gained 1/2 point to yield 6.518%. Analysts and traders say breaking the 6.5% yield level is pyschologically important for market participants because it could fuel a broader rally that may bring bond yields close to 6.3%.

Despite the light trading activity that often exaggerates price movements, economists attributed Friday's activity to a stream of market-friendly economic data, most of which underscored the scenario of a weak U.S. economy, poor consumer confidence, and, most importantly, low inflation.

The bad economic news means that inflation - the bane of all fixed-income investments - is not a factor, at least in - the near-term, economists say.

On Friday, for example, the Federal Reserve reported that industrial capacity utilization fell 0.3 points in June to 81.2%, while U.S. industrial production decreased 0.2% last month, led by a decline in the output of automobiles and other consumer goods.

The market largely brushed off the news that the U.S. merchandise trade deficit fell 17.8% in May to $8.4 billion, and gained momentum later in the day when news hit the Street of an unexpectedly weak consumer confidence report out of the University of Michigan.

The university's consumer sentiment index decreased to 76.9 for early July from 81.5 in June, market sources who have access to the report told The Bond Buyer.

~I think you can see the long bond at 7% by the end of the year," said Kathleen Stephansen, a senior economist at Donaldson, Lufkin & Jenrette Securities Corp. "The data shows that the economy in sluggish and consumer confidence is weak."

Traders, however, said Friday's activity in many ways underplayed the potential for market volatility in the coming weeks. For example, many traders predicted that rates could rise somewhat as the market digests the large borrowing agenda of the U.S. Treasury.

Economists expect the Treasury to sell about $39 billion in notes and bonds during its quarterly borrowing in the second week in August

"I'm not negative on the market," said Woody Jay, head of government trading at Lehman Brothers. "But I think the market will be in a holding pattern until after the refunding."

The September bond futures contract closed 1/4 higher at 115 30/32.

In the cash market, the 7 1/8% 30-year bond rose 7/32-107 20/32, to yield 6.53%.

The 6 1/4% 10-year note rose 2/32, at 104 2/32-104 4/32, to yield 5.68%.

The three-year 4 1/4% note was unchanged, at 99 29/32-99 31/32, to yield 4.26%.

Rates on Treasury bills were steady to lower, with the three-month bill unchanged at 3.06%, the six-month bill down one basis point at 3.13%, and the year bill down one basis point at 3.26%.

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