In what was a lethargic day for the bond market, the 30-year Treasury broke free from its shorter-dated cohorts today and managed a slight rally, while the rest of the yield curve finished the day pretty close to unchanged. With only one economic release out today, the market's attention was focused on the inversion in the yields of the 30-year bond and the 10-year note, a spread that continued to collapse today.

Inversion, meaning that the yield on the shorter-dated, 10-year security is trading higher than the longer-dated 30-year, occurred earlier this week. It was reinforced during the last couple days as opportunistic traders sought to exploit the move by further selling 10-year notes and buying the 30-year bond.

Elizabeth Roy covered the inverted yield curve in a story earlier

today.

Lately the 30-year Treasury bond was up 16/32 to 92 18/32, dropping the yield 3 basis points to 6.706%. The 10-year note, meanwhile, was up just 3/32 to yield 6.78%. Though the 10-year remained virtually unchanged, traders who sold that note still profited by the 30-year rally.

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There's a number of reasons for this recent inversion. Some link it to the Treasury's recent decision to start buying back old long-dated bonds, or off-the-run bonds. Others believe it to be inflation-related, because the 30-year bond is most sensitive to lowered inflation expectations.

With Federal Reserve officials striking an aggressive pose against inflation in their speeches, the 30-year bond's the one in vogue right now.

"The 10-year has been the dog of the week, and of the year," said Richard Gilhooly, senior bond strategist at

Paribas Capital Markets

. The curve is now inverted by 7 basis points, but the 10-year yielded 4 basis points less at the beginning of the year.

However, strategists said retail interest has emerged in the off-the-run sectors (that's old, less liquid Treasuries) and in the long bond, as value investors are beginning to buy at these levels. That hasn't spread to the 10-year bond, however, a sector that's been weighed down by corporate supply and traders still betting against the 10-year note.

"The long bond has been oversold, and it lends itself to people stepping in," said Dennis Hynes, market strategist at

R.W. Pressprich

. Buyers are still eschewing the 10-year, he said, because of supply and "higher

fed funds rates effects shorter maturities more than longer ones."

Right now, the market is fully factoring in a 25-basis-point rate hike in the fed funds rate to 5.75% on Feb. 2. The fed funds futures traded on the

Chicago Board of Trade

are putting 20% odds on a 50-basis-point hike. The futures didn't react to

Fed

Governor

Lawrence Meyer's

tough-talking

speech yesterday.

The market is facing a few more pitfalls before the Feb. 1-2

Federal Open Market Committee

meeting, but Gilhooly believes today's activity is a precursor to a broader rally in the entire yield curve, because the market has already priced in more bad news than may actually occur.

The bond market's been on a slippery slope for more than a year now, though, and it's going to take a few strong rallies before the market is convinced that it can be sustained, especially with the Fed threatening higher interest rates.

Fed Chairman

Alan Greenspan

appears before Congress twice next week. He speaks to the

Congressional Budget Committee

on the budget Tuesday, and he'll be grilled (or, more likely, gushed over) at the

Senate Banking Committee's

hearings to confirm him for a fourth term as Fed head Wednesday.

The most pressing economic release next week is the fourth-quarter

Employment Cost Index

, an important measure of wage costs. Economists polled by

Reuters

are expecting a 0.9% increase in the ECI, compared with a 0.8% increase in the third quarter, when the report is released Thursday.

Today's only economic release was the monthly

federal budget

statement, which showed a $33 billion surplus for December 1999, compared with a $5.1 billion deficit in December 1998. Three months into the fiscal year 2000, the government is running a $20.6 billion deficit.