Treasuries posted their first gains in over a week Friday, but the gains came on extremely light volume and analysts attributed them mainly to short covering.

The bond market is vulnerable to another move higher in yields next week, when the

Fed

meets and may issue a statement on the likely future course of official interest rates, and two key economic reports bring the outlook further into focus, market watchers added.

The benchmark 30-year Treasury bond ended the day up 6/32 at 87 27/32, trimming its yield a basis point to 6.15%. It was the long bond's first gain since June 17. Shorter-maturity note yields also shed a basis point or so.

While a few important economic reports were released, analysts said short covering ahead of the weekend was the main reason for the move. "Sentiment remains persistently negative," said Bill Sullivan, chief money-market economist at

Morgan Stanley Dean Witter

. "Any improvements have represented short covering and faded quickly, and today is no exception."

Describing today's action as "technically traded but very thinly traded,"

Stone & McCarthy Research Associates

Treasury market analyst John Canavan said that while key technical levels held in the bond market yesterday and overnight, "the path of least resistance remains to the downside." Typically for a post-Memorial-Day Friday, tracker

GovPX

measured volume down 36.7% relative to an average second-quarter Friday at 3 p.m.

Bolstering the notion that short covering was responsible for much of today's move, Treasuries wound up with relatively small gains at the end of the day, after trading up pretty sharply in the morning. The long bond traded up as much as 18/32 at around 9 a.m. EDT.

From the day's slate of economic indicators, the only one that may have encouraged some buying of Treasuries was the May

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existing home sales

report, Sullivan said. The second consecutive drop in the pace of sales to 5.04 million from 5.25 million in April is "a hint that one interest-rate-sensitive sector of the economy is beginning to show some effect from the recent rise in open-market yields," he said. Economists surveyed by

Reuters

had expected the pace to hold up at around 5.23 million.

Treasuries are likely to keep biding time till Wednesday, when the fun starts. The Fed, meeting in Washington on Tuesday and Wednesday, is widely expected to announce at the meeting's conclusion a 25-basis-point hike in the fed funds rate, from 4.75% to 5%. Because Fed Chairman

Alan Greenspan

telegraphed the move so clearly in congressional testimony on July 17, the focus has shifted to what if anything Fed policymakers will say in the statement they will presumably release to announce the rate change.

Will they revert from a bias in favor of a higher fed funds rate to a neutral bias and announce it? Will they retain the tightening bias and announce it? Or will they say nothing about a bias (in which case traders will assume the tightening bias remains in place)? Most analysts say the market is priced more for the second or third possibilities than for the first, holding out hope for a relief rally if a neutral bias is announced, Canavan said.

Does it even matter what the Fed says? At some level, it doesn't, Sullivan said, adding that he wouldn't be surprised to see Treasury prices move very little on Wednesday regardless of what the Fed says (unless policymakers shock the markets with something other than a 25-basis-point hike).

The economic data are going to determine whether the Fed hikes the funds rate again in August and beyond, Sullivan said, so it's the economic data that has the real potential to reprice the bond market, starting with Thursday's June

Purchasing Managers Index

and Friday's

employment report

.

There will doubtless be reams of analysis of the Fed's words on Wednesday, but in the final analysis, Sullivan said, "It will all be peripheral to where the market winds up on July 2."