Treasury prices fell as the money market began to feel the weight of Federal Reserve chairman Alan Greenspan's Congress testimony yesterday. The early session began quietly, but there was considerable selling in the late afternoon. Yields were up more steeply for the shorter dated notes, while the five-, 10- and 30-year maturities dropped their values by at least half a point.

Although Greenspan talked at length about the fragile economy in his address to the

Senate Banking Committee

and even suggested that recovery may not gather pace until much later this year, he also hinted that the basics were properly configured for now to help the revival. In the context of cutting interest rates, he was therefore far less aggressive than what traders had been hoping for.

The benchmark 10-year

Treasury note fell 22/32 to 98 25/32, raising its yield 9.2 basis points to 5.158%.

The 30-year

Treasury bond fell 16/32 to 98 28/32, raising its yield 3.4 basis points to 5.449%.

"People were hoping for more easing to come earlier, and though Greenspan didn't say that he wouldn't cut rates, it is clear that he will go down a slower path," said Vincent Verterano, head of government bond trading at

Nomura Securities

, adding that benefits derived from the proposed tax cuts will also affect the short- to mid-term Fed policy.

But he didn't think that the market today was negative. In his view, some traders had gone ahead of themselves in earlier speculation and were simply trimming off those overbought positions.

A couple of high-ranking Fed officials commented upon the economy and how the central bank is dealing with the situation.

Roger Ferguson, the vice-chairman of the Federal Reserve, after speaking on e-commerce at

Vanderbilt University's

business school, told reporters that consumer confidence is still at a level where it can drive economic growth but that its delicate state requires careful handling. He regards inflation as a non-issue and said the Fed's ongoing focus would be to engineer a soft landing, referring specifically to the "downside risk" that Greenspan had mentioned yesterday.

Federal Reserve Bank of Minneapolis

President Gary Stern also sounded upbeat in a Rotary club speech, saying that although the economic slowdown in the last six months had been "sharper and more broadly based" than expected, the damage was mostly in the manufacturing sector. He admitted that higher energy prices and the waning equity market were a concern but characterized the overall long-term economic prospects as positive.

Stern, who does not vote in the

Federal Open Market Committee meetings, also took comfort from last month's data. "The January numbers on the economy in my view are a bit more constructive. One month doesn't make a trend, but you look at the retail sales data, the employment data, and it looks like an O.K. month," he said.

In other statements Ferguson and Stern followed the example of their chief by highlighting the gains in productivity, supporting the proposed tax cuts, noting the inventory adjustment currently under way and emphasizing the flexible approach of the Fed in implementing monetary policy.

The message seemed to be that while Greenspan's team has been careful not to under-react to the recent economic crisis and will continue to be watchful of the situation, it does not want to overcorrect interest rates at this stage, since some of the underlying fundamentals are in place for a definite, though gradual, turnaround.

A

Reuters

poll of 25 Wall Street bond dealers conducted after the testimony indicates that the earliest Fed move will likely be a half percent-point cut in the

fed funds rate at the next Federal Open Market Committee meeting on March 20.

At the

Chicago Board of Trade

, the March

Treasury futures contract fell 6/32 to 104 1/32.

Economic Indicators

In economic news,

business inventories

(

definition |

chart |

source

) rose by 0.1% for the month of December, down from 0.3% in the previous month. The growth was .1% less than economists had predicted and is the smallest rise since January 1999. The trend confirms Greenspan's observations yesterday that information technology is enabling companies to better balance their stock of goods when faced with fluctuating demand. The year-to-year rise in the number also dropped to 6.1% from 6.6% and is now at its lowest level since May.

Currency and Commodities

The dollar fell against the yen and rose against the euro. It lately was worth 116.42 yen, down from 116.70. The euro was worth $0.9178, down from $0.9206. For more on currencies, see

TSC's

Currencies column.

Crude oil for March delivery at the

New York Mercantile Exchange

fell to $29.65 a barrel from $30.36.

The

Bridge Commodity Research Bureau Index

slipped to 223.44 from 224.34.

Gold for March delivery at the

Comex

fell to $29.65 an ounce from $30.36.