Treasuries ended lower, with the long bond taking the bigger price hit as dealers were faced with a possible extension of its shelf life. The market's auction of $11 billion worth of new five-year notes, the first part of the $32 billion in new and reopened Treasury debt to be sold this week, did not affect trading in that security over the course of the day. In the early session, though, dealers sold a bit to create space in their portfolios for the latest available issues due in the afternoon. Yields were marginally higher at the closing bell.

The benchmark 10-year

Treasury note fell 7/32 to 104 3/32, raising its yield 2.8 basis points to 5.199%.

The 30-year

Treasury bond fell 19/32 to 110 22/32, raising its yield 1.6 basis points to 5.509%.

Last week the

Bond Market Association's

Treasury Borrowing Advisory Committee, made up of investors, had suggested that the 30-year bond be removed after its August sale, due to continued Federal budget surpluses. However, yesterday, another BMA committee, the Primary Dealer Committee, composed of dealers that trade directly with the

Federal Reserve in the Treasury market, advised against it. They want to lessen the cost of buying back older debt. The committee also said that the 30-year remained the most suitable security for long-term bond investors.

As the market second guesses itself on whether the long bond deserves its recently attained scarcity value, the yield curve, which tracks the yields of money instruments toward their dates of maturity, is once again becoming steeper as the price of the 30-year falls and its yield climbs. The current difference, or spread, between its yield and that of the 2-year note currently stands at a little more than 0.9 percent.

The Standard & Poor's

speculative grade credit index, which measures the yield difference between the Treasuries and corporate bonds, is still near its three-month low of about nine percentage points. The Fed's lowering of interest rates has been strongly affecting this trend, as companies have introduced bonds bearing lesser interest into the market, which still manage to stand out against the lower yielding Treasuries.

The current week is not an especially critical one for weighty economic data. In his monthly conference call to the press,

Merrill Lynch

chief economist Bruce Steinberg concentrated on events of the past fortnight when terming the economy as "sluggish but not recessionary."

"Consumer confidence remains way above recession level and consumer spending is slowed but is not contracting," he reasoned.

Steinberg believes that economic recovery will follow a V-shaped curve rather than the U or L-shaped pattern, and predicts that the

gross domestic product

(

definition |

chart |

source

) will average about 4% in the year 2002. While the V outline denotes a quick rebound, the U signifies a longer period of healing and the L shape implies an extended period of zero growth. He put much emphasis on the central bank's easing of interest rates (the Fed eased twice in January).

"The Fed's recent interest rate cuts have been its most aggressive measure in 16 years, and another 50 basis-point cut is likely on March 20. There is at least another 75 basis points of Fed easing coming," noted Steinberg.

He feels that the financial market's performance will be determined by whether "the rebound in the economy is strong or tepid."

Meanwhile, there was partly reassuring news about the energy crisis in California from Mary Daly, senior economist at the

San Francisco Federal Reserve

.

Reporting on the effect on businesses in the western district (as territorially divided by the Fed), Daly said, "Although rising natural gas prices have hurt some producers and consumers in the Twelfth district, there is little evidence that rising costs have significantly slowed economic growth in the region."

She calculates that even if natural gas prices remain high this year, their economic impact will not be as severe as that of the Asian financial crisis in 1997. However, she didn't comment on the electricity dilemma, which remains bogged in legislative debate.

Analysts have been understating the effect of California's energy crisis when putting it in the national perspective, but the domino effect of the problem can reach into the bond-fund holdings of creditor corporations.

At the

Chicago Board of Trade

, the March

Treasury futures contract fell 11/32 to 104 11/32.

Economic Indicators

In economic news, the

BTM-UBSW Weekly Chain Store Sales Index

(

definition |

chart ) was down 0.1% for the week ended Feb.3 after having advanced 0.6% the previous week. The slight fall was due to a decrease in consumer spending, with no retailer exceeding the weekly sales target. The yearly moving average rose 3.7% from its reading 12 months earlier, although it was down from the 3.9% rise recorded at the end of January. Analysts believe that consumer spending is unlikely to fall further. They expect spending to revive, thanks to the cash freed up through mortgage refinancing, lower tax rates and the Fed's easing of interest rates.

The

Redbook Retail Average

(

definition |

chart ) rose for the fifth week of January. It is up 2.2% from its value in the closing week of December. Sales for the month rose 3.2% from the same period a year ago. Sales are expected to rise 3.1% in February. Heavy promotions and deep discounts sent merchandise moving off shelves, keeping sales numbers healthy.

Currency and Commodities

The dollar fell against the yen and rose against the euro. It lately was worth 114.73 yen, down from 114.82. The euro was worth $0.9300, down from $0.9380. For more on currencies, see

TSC's

Currencies column.

Crude oil for March delivery at the

New York Mercantile Exchange

slipped to $30.35 from $30.55.

The

Bridge Commodity Research Bureau Index

fell to 225.93 from 226.45.

Gold for March delivery at the

Comex

fell to 263.30 an ounce from $265.20.