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Treasuries Recover from Early Weakness

But fear of what Fed Chairman Alan Greenspan might say tomorrow is running high.

Bond prices finished little changed after a session that included a successful test in the futures market of the lowest price at which the benchmark Treasury issue has traded this year.

Now traders are braced for the possibility that



Alan Greenspan

will drop a hint in his

speech tomorrow at the

Chicago Fed's annual conference that the central bank's policymaking arm is inclined to switch from a neutral bias to a bias in favor of a higher fed funds rate. The Fed chief speaks at 9:25 a.m. EDT. The April

employment report

, the most important monthly economic release, scheduled for release Friday morning, also looms.

The 30-year Treasury bond finished the day up 3/32 at 93 16/32, its yield unchanged at 5.71%, a nine-month high. Shorter-maturity note yields were likewise unchanged or very little changed.

But the outcome belies the day's action, which, though volume was light, was an interesting ride.


yesterday's selloff, bargain hunters came sniffing around in the early going, and took the long Treasury up as much as 8/32 shortly before 10 a.m. But then a combination of factors -- two stronger-than-expected economic reports and the pricing of a huge federal agency bond issue -- triggered a bout of selling.

On the economic front, a couple of sleepers did some damage. The March

factory orders

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report, normally ignored because it largely rehashes the

durable goods orders

report released a week earlier, massively revised the durables number, chipping away at doubt that the manufacturing sector is resurgent. Factory orders outpaced expectations, rising 2.0% vs. an average forecast among economists surveyed by


of 1.2%, largely because the rise in durables orders was revised to 2.9% from 2.0%.

Meanwhile, the

Purchasing Managers Non-Manufacturing Index

, normally ignored because it's not even two years old and isn't seasonally adjusted yet, attracted some attention because it raised an inflation flag. A component of the index that ascertains whether service-sector companies are paying higher or lower prices for the things they buy rose sharply, to 55.5 from 50.0 (50 indicates no change). Yet more evidence that producers are encountering rising prices, which they may eventually pass on to consumers.

Selling was also triggered by

Fannie Mae's


pricing of a $4.5 billion five-year bond shortly after 9 a.m., said Mike Franzese, a note trader at

Zions First National Bank


The market recovered due in part to a late-morning coupon pass by the


, in which the central bank's Open Market Desk bought nearly $1 billion of securities maturing this year and next year in order to put enough money into circulation to keep the fed funds rate on target.

The recovery was also attributable, trading desk sources said, to the fact that a key support level held in the futures market. This year, the long Treasury futures contract traded on the

Chicago Board of Trade

has traded as low as 119 9/32, on March 4. Today,

Bear Stearns

Treasury market strategist Avram Altaras said, traders "tried to see if it would break through that level, and it didn't. It held."

"People were gunning for sell stops at 119 9/32," Franzese concurred, "but it never got that low, so it was a pretty good test for the Treasury market."

The 2 p.m. release of the Fed's

Beige Book was a nonevent for the market. The anecdotal report on economic conditions around the country prepared eight times a year continued to marvel at the coexistence of tight labor markets and price stability in the economy.

The Treasury's press conference announcing the details of the quarterly refunding, a pair of auctions slated for next Tuesday and Wednesday in which new five- and 10-year notes will be sold, was likewise nearly free of market-moving news. The Treasury

said it will sell $15 billion of five-year and $12 billion of 10-year notes, the expected amounts.

(The only significant price action resulting from the conference,

Warburg Dillon Read

Treasury strategist Mark Mahoney said, was a rally in one-year bills, which an advisory committee to the Treasury recommended reducing the frequency of, in order to accommodate its reduced borrowing needs. The year-bill yield shed 4 basis points to 4.75%.)

Now traders are preparing for Greenspan and the jobs report. Franzese said it's a tricky trade, because any hint by the Fed chairman that a higher fed funds rate is in the offing should trigger selling, but at the same time traders are reluctant to sell too aggressively ahead of the jobs report, in case it spurs a rally. "You could see what happened with the ECI," he said, referring to

last Thursday's first-quarter

Employment Cost Index

, which printed signficantly weaker than expected, triggering a rally. "People were short and they got smoked."