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The Treasury market lost ground today, an unsurprising development after last week's big rally and ahead of this week's auctions of new notes and bonds. Especially auctions that follow so closely on the heels of a massive repricing of the Treasury market that has many investors very confused.

Also, the pricing of a $5.25 billion corporate bond from

Vodaphone Airtouch


-- with interesting results, in light of the recent changes in the Treasury market -- sapped demand for Treasuries.

With no economic data on the docket, bond traders focused primarily on the Treasury auctions, which start tomorrow.

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The so-called quarterly refunding consists of three auctions: $12 billion of five-year notes tomorrow, $10 billion of 10-year notes on Wednesday and $10 billion of 30-year bonds on Friday. If dealers can push the market lower ahead of the refunding, they can pick up the new notes and bonds at lower prices. So it's standard for the Treasury market to go down before the refunding.

What's not standard is for the Treasury market to undergo a complete makeover in the weeks before the refunding. In the last few weeks, the Treasury yield curve has inverted, sending long-term yields lower than short-term yields. That has happened because short-term yields are being held up by the


, which last week hiked the

fed funds rate

and indicated it would probably do so again in the near future. Meanwhile, long-term yields moved lower after the

Treasury Department

elaborated on plans to curtail the supply of long-dated issues. Relative scarcity drove their prices disproportionately higher.

The radical shifts in Treasury valuations have some investors perplexed enough that they may stay away from this week's auctions, said Mike Franzese, a trader at

Zions First National Bank

in Jersey City. "Normally, we have good participation in the auctions from certain customers, but our sales force is not getting anything," he said.

"People are trying to find their footing," Franzese said. "Maybe the

30-year bond is decoupled from the rest of the market, or maybe the worst is behind us," and the 30-year issue will come back into a more normal position relative to its shorter-maturity counterparts.

The 30-year Treasury bond ended down 27/32 at 97 5/32, lifting its yield 6.5 basis points to 6.339%. The 10-year note fell 18/32, lifting its yield 8.3 basis points to 6.641%. The five-year note dropped 10/32, lifting its yield 8 basis points to 6.735%. And the two-year note shed 2/32, lifting its yield 3.5 basis points to 6.665%.

At the

Chicago Board of Trade

, the March

Treasury futures contract ended down 24/32 at 94 12/32.

Very light volume in Treasuries today, which is unusual before a refunding, "suggests there's probably more downside potential going into these auctions," said Ken Logan, managing analyst at

Thomson Global Markets

in Boston. Also arguing in favor of continued weakness in Treasuries is last week's big rally, which short-covering accounted for much of, Logan said. "The short squeeze probably erased a lot of the market short-based, and it probably needs to be restocked."

"I see it mainly as an unwinding,"

Barclays Capital

senior economist Henry Willmore concurred. At least some of the people who covered shorts in the Treasury market last week did so mainly as a precaution, Willmore said. "Because they didn't know how far it could go." Once the squeeze seemed to have played itself out, the selling from possibly overvalued levels could resume.

Vodaphone Rejects Long Bond as Benchmark

The Treasury yield curve may have inverted, but that doesn't mean corporate borrowers can save any money by going long.

Today's Vodaphone deal illustrated that the corporate yield curve maintains its positive slope -- longer-maturity issues yield more than shorter-maturity ones. Vodaphone sold $1.75 million of five-year bonds, $2.75 million of 10-year bonds, and $750 million of 30-year bonds. The five-years were priced to yield 7.663%, the 10-years to yield 7.84% and the 30-years to yield 7.99%. Contrast that to the Treasury curve, where the five-year note yields more than the 10-year, which yields more than the 30-year bond.

The results point up that "there's nothing really fundamental behind the

Treasury curve inversion," said John Atkins, market analyst at

. If there were, there would be some degree of participation in the trend by the other bond markets, he said.

Meanwhile, the inversion of the Treasury curve has created a problem for the corporate market. When corporate bonds are sold to investors, the key number is the spread to Treasuries; in other words, how much higher is the corporate bond's yield than a comparable Treasury's? If the Treasury curve is inverted and the corporate curve is not, spreads to Treasuries will be abnormally large for the longest-maturity issues.

To get around the problem, corporate bond underwriters started with the Vodaphone deal to price 30-year and other long-maturity corporate bonds off the 10-year Treasury rather than the 30-year Treasury. For example, Vodaphone's 30-year bonds were priced 143 basis points over the 10-year Treasury, compared to a 128-basis-point spread for the 10-year bonds. It's merely a convention and doesn't affect the issuer's cost of money. But it clearly illustrates the increasing irrelevance of the 30-year Treasury bond.

Economic Indicators

There were no economic releases today. This week's highlights are preliminary

productivity and unit labor costs

for the fourth quarter, tomorrow, and January

retail sales

on Friday.

Currency and Commodities

The dollar rose against the yen and the euro. It was lately worth 108.67 yen, up from 107.20 on Friday. The euro was worth $0.9802, down from $0.9825 on Friday.

Crude oil for March delivery at the

New York Mercantile Exchange

fell to $28.45 from $28.82 on Friday.


Bridge Commodity Research Bureau Index

fell to 211.60 from 213.24 on Friday.

Gold for April delivery at the


gave back earlier gains to close at $304.50 an ounce, down from $313.00 on Friday.