Treasuries Mixed as Year's Last Auction Looms

Also, Bill Gross reiterates his call that 6.50% marks the approximate end of the bear market.
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The Treasury market is mixed this morning, awaiting the outcome of this afternoon's monthly two-year note auction. But even that is failing to generate much interest in a market that has nothing else major to look forward to this year. Volume is paltry, sources said.

After yesterday's meeting of the

Federal Open Market Committee, at which the

fed funds rate was left unchanged, "The Fed's out of the way, primary data's out of the way, Y2K is on the horizon, and people just want to get out and go home," said John Canavan, Treasury market analyst at

Stone & McCarthy Research Associates

. "There's no trading going on, and we're just meandering back and forth on either side of unchanged."

The benchmark 30-year bond was lately up 7/32 at 95 26/32, trimming its yield 2 basis points to 6.44%. Shorter-maturity notes were underperforming, their yields unchanged to a basis point lower on the day. That's because in addition to this afternoon's two-year note auction,

Fannie Mae

(FNM)

is adding $5.5 billion of short-term supply to the broader bond market today, selling $4 billion of 3-month bills and $1.5 billion of 6-month bills.

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On the economic calendar, the

Commerce Department

issued its final measure of third-quarter

GDP

, revising it up slightly to 5.7% from 5.5%. Upward revisions to inventories and consumer spending pulled the number up, partially offset by downward revisions to business investment and the trade balance. The news had no effect on bond trading,

Barclays Capital

senior economist Henry Willmore pointed out in a research note, because "the implications for growth in subsequent quarters are minimal."

There's a bit of suspense surrounding the two-year note auction. If the to-be-issued notes are trading at a yield between 6.125% and 6.249% at bid time (1 p.m. EST), the Treasury will deem the issue a reopening of the five-year note it issued in December 1996, which carries a 6.125% coupon and is due in December 2001. Lately the new issue was trading at a yield of 6.223%. Safe to say its yield won't drop below 6.125% in the next hour, but it could conceivably rise above 6.249%.

Providing some relief from the quietude, bond guru

Bill Gross

published his monthly market commentary on the

Pimco

Web site today. After the customary bizarre introductory anecdote, the star fund manager reiterates his call that a yield of 6.50% on the long bond "would represent a significant top in a continuing disinflationary economy," but adds: "

Don't hold us to the basis point."

"As we approach Y2K," Gross writes, Pimco's portfolios "have durations slightly lower than their bogies in anticipation of even higher yields over the near term."