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On Hold, Treasury Market Ponders Possibilities

Everyone's negative and with good reason, but support seems firm at the highest yield levels in over a year.

Treasuries are little changed on light volume at this hour, after starting the day lower and then rallying into positive territory thanks mainly to short-covering, analysts said.

With no major economic data out today and bids due on the first leg of the Treasury's quarterly refunding at 1 p.m. EDT, traders have little to do but worry about the next week's inflation reports (the



Consumer Price Indices

) and what kind of statement the


will release after its next meeting on Aug. 24, when it is widely expected to hike interest rates. The results of the five-year note auction, the refunding's first leg, will be announced at 1:30, and they will give an indication of the level of demand for Treasuries at today's yields, which are some of the highest since the fall of 1997.

The benchmark 30-year Treasury bond was lately up 2/32 at 86 26/32, trimming its yield a basis point to 6.23%.

"The market is very, very rangebound,"

Bear Stearns

Treasury market strategist Avram Altaras said. "I don't think we're going to see much till after the auctions." The quarterly refunding continues tomorrow with a $12 billion 10-year note auction and concludes on Thursday with a $10 billion 30-year bond auction.

The level of demand for the new issues is tough to predict, Altaras said. "Everyone seems to be negative and with sufficient reason," he said. "The Fed is expected to raise rates and the data has been strong. But the market is oversold and is sitting on strong support levels." Support for the long bond, for example, is strong at the 6.25% yield level.

There has been talk in the market that the 30-year auction will go better than the other two because the 30-year issue is the last one of the year, and millennium date-change concerns are likely to goose demand for the newest, most liquid Treasuries. But Altaras doesn't buy it. "Something you can predict usually doesn't happen," he said.

Renewed widening of the yield spreads between Treasury issues and riskier bonds this morning has triggered some buying of riskier issues today, Altaras said.

But interest in Treasuries today is almost completely technically driven,

Thomson Global Markets

managing analyst Ken Logan said. "Everyone's talking about how the various technical indicators are extremely oversold, and that's inspired some short-covering by the black-box types," he said, referring to traders who act only in response to technical signals.

Logan thinks the Treasury market stands a decent change of rallying after the refunding -- provided that the PPI and CPI are mild.