Stronger-than-expected demand at the five-year note auction sete off an impressive technical rally in the Treasury market yesterday afternoon.

Late in the day, the 30-year bond was up 1 1/8 points and yielded 6.91%, while note prices were 1/8 to 5/8 point higher.

Analysts said big price gains did not reflect any change in market sentiment and were not a response to any of yesterday's news.

"We're locked in this trading range we've been in since early March, and we were at the oversold end, with a lot of shorts out there, and the market punished them" said Joseph Liro, chief economist at S.G. Warburg & Co. "We're just viciously chopping around the 7% level on the bond."

The rally occurred after the successful fiv-year sale sent the bond futures contract through a key resistance level. Prices rose rapidly when the breaching of that level resulted in a wave of short-covering.

Traders had expected respectable demand for the $11 billion of five-year notes the Treasury sold yesterday.

Instead, the auction results showed bidding had been aggressive. The five-years were sold at an average yield of 5.395, instead of the 5.40% traders expected at auction time, and even those who bid at 5.39% got only 8% of what they requested.

The suprisingly strong results meant that many dealers tailed to get securities they needed, and after the result were announced, their purchases of the new notes in the secondary market began to push prices higher.

As the market rose, the June bond futures contract broke above 110 22/32, a level that has served as resistance for the last couple of weeks.

Scott Winningham, chief market analyst at Stone & McCarthy Inc. in Priceton, N.J., said that when the bond contract broke through that level, it set off a number of stop-loss orders on short positions, and resulted in other buying as well. In short order, the contract rallied above 111.

As Treasury prices rose, the yield on the new 5 3/8 five-year notes fell. Late yesterday, the notes were yielding 5.30%, down sharply from the 5.39% auction average.

Traders said the bidding at the auction was mostly professional, as was the short-covering rally that followed: "Retail was forced in at the end" of the rally, a note trader said.

"In this environment, I don't think portfolios can be all that eager to take on securities," said Anthony Karydakis, a senior financial economist at the First National Bank of Chicago, citing the possibility that the Federal Reserve may tighten monetary policy.

Karydakis said that even though the bond market posted big gains yesterday, it is still in fragile condition. "Even fairly secondary things going to wrong way could knock the market down here," he said.

Liro said he thought the bond market was still focused on the inflation fears that surfaced when the April price indexes showed bigger-than-expected increased. As long as those inflation fears are offset by weak economic growth, the bond market will be trapped in this price range, with the 30-year bond trading between 6.75% and 7.05%, he said.

Traders said the market would be vulverable today if the House fails to pass the President's budget package, or even if the vote is postponed.

Also today, participants will be watching to see if the money supply numbers show the big increases posted over the last couple of weeks.

"We're not looking for a third week of big gains, but that means there's the potential for a nasty surprise," Winningham said.

There were other factors favoring the bond market yesterday, including a decline in the price of gold and in the Commodity Research Bureau's index of other materials prices. But traders said those prices had little impact on the market.

Treasury prices posted modest gains in overseas trading yesterday, and inched a little higher in early New York trading when the Commerce Department reported no change in April durable goods orders, following a revised 3.7% decline in March.

The consensus forecast called for a 1.6% increase in orders.

Economists said the flat orders confirmed that economic growth remains sluggish.

But some analysts were troubled by the 0.6% decline in unfilled orders in the April report. The decline put unfilled orders at their lowest level since November 1988.

"For that to be falling as deeply as it has is a disturbing sign," said Frederick Sturm, an economist at Fuji Securities. "The factory sector is still under a cloud."

The June bond features contract closed 7.8 higher at 111 1/32.

In the cash market, the 7 1/8% 30-year bond was 1 1/8 points higher, at 102 16/32-102 18/32, to yield 6.91%.

The 6 1/4% 10-year note rose 19/32 to 101 5/32-101 7/32, to yield 6.08%.

The three-year 4 1/4 note was up 1/4, at 99 7/32, to yield 4.51%.

In when-issued trading, the 4 1/4% two-year notes were up 5/32, at 99 30/32-91 31/32, to yield 4.14%.

Rates on Treasury bills were lower, with the three-month bill down three basis points at 3.04%, the six-month bill off three basis points at 3.19%, and the year bill off five basis points at 3.33%.Treasury Market Yields Prev. Prev. Wednesday Week Month3-Month Bill 3.08 3.02 2.966-Month Bill 3.26 3.15 3.061-Year Bill 3.43 3.33 3.232-Year Note 4.14 3.97 3.853-Year Note 4.51 4.40 4.205-Year Note 5.27 5.20 5.147-Year Note 5.71 5.68 5.6010-Year Note 6.08 6.06 6.0130-Year Bond 6.91 6.96 6.91 Source: Cantor, Fitzgerald/Telerate

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