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Buyback Announcement Gives Treasuries a Lift

The government will attempt to take another $1 billion of long-dated securities out of circulation on Thursday.

Thanks mainly to an announcement by the Treasury Department that it wants to buy $1 billion worth of its securities from investors on Thursday, the Treasury market rallied strongly today, dropping the benchmark 10-year note's yield to its lowest level in nearly three months.

Falling oil and stock prices helped the rally along, as did short-covering, market analysts said. But the market's strong performance so far this week makes it vulnerable in the event that inflation data due out Thursday and Friday are stronger than expected, one said.

The 10-year Treasury note, which traded down as much as 9/32 at 8:30 a.m. EST, ended up 18/32 at 101 16/32, trimming its yield 7.6 basis points to 6.294%, its best closing yield since Dec. 18. The 30-year Treasury bond rose 31/32 to 102 2/32, trimming its yield 7 basis points to 6.099%, its best close since Feb. 22.

At the

Chicago Board of Trade

, the June

Treasury futures contract gained 22/32 to 95 1/32.

Early in the session, Treasury prices reacted well to the February

retail sales

report, which was strong, but in some respects not as strong as people feared it might be.

Overall retail sales, which had been forecast to rise 1.0% by economists polled by

Reuters

, rose 1.1%, the largest increase since December. The biggest boost came from gasoline sales, which rose 4.3% as prices went up. The year-on-year pace of retail sales growth hit 13.9%, the fastest pace in at least 10 years.

Excluding autos, which sold at a record high pace for the current expansion in February, retail sales rose 1.0%, compared with an average forecast of 0.6%.

But the bond market was comforted by the fact that the results for January weren't revised up by large amounts, as many economists predicted would happen. The January gain was revised from 0.3% to 0.4%. Excluding autos, a 0.3% drop was revised to a 0.5% decline.

Then came the buyback announcement, which had been expected by the end of the month, but not necessarily today.

Last Thursday, the department bought $1 billion of securities from investors in its first such operation in 70 years. This Thursday, the department announced, it will target 30-year bonds issued between 1988 and 1991.

The buyback program, which the Treasury has said will take up to $30 billion of long-maturity issues out of circulation this year, is one of the ways it is dealing with the federal budget surplus, which reduces its need to borrow. By buying back old issues while continuing to issue new ones, the department helps maintain the liquidity of its securities.

The market rallied as much as it did today in part because the buyback announcement had an element of surprise,

Morgan Stanley Dean Witter

money-market economist Kevin Flanagan said. Also, short-covering by people who expected Treasuries to give up some ground in response to either a more stable stock market or the inflation data due out Thursday and Friday, accounted for part of the move, market analysts said.

As a result, Treasury prices could fall harder now if the inflation data -- the

Producer

TheStreet Recommends

and

Consumer Price Indices

are very strong, said Josh Stiles, senior bond strategist at

IDEAglobal.com

. "We cannot presume we're immune to strong inflation numbers," he said. If Treasury investors "see the data and don't like it, a billion of buybacks could be dwarfed by their selling."

Economic Indicators

Also today, the

BTM/Schroder Weekly Chain Store Sales Index

rose 0.4%, its largest gain in four weeks. But the year-on-year pace fell from 2.5% to 2.4%, the lowest since December 1997.

The

Redbook Retail Average

showed that sales during the first two weeks of March were even with the full month of February, relative to expectations for a 0.2% decline.

Currency and Commodities

The dollar weakened against the yen and the euro. It lately was worth 105.01 yen, down from 105.64 yesterday. The euro was worth $0.9674, up from $0.9645. For more on currencies, please take a look at

TSC's

new

Currency Watch column.

Crude oil for April delivery at the

New York Mercantile Exchange

fell to $31.60 a barrel from $32.02.

The

Bridge Commodity Research Bureau Index

rose to 216.25 from 215.93.

Gold for April delivery at the

Comex

fell to $289.70 an ounce from $291.50.