BridgeNews--Chicago, Monday, Aug. 14

Central Time

------------------------------------------------------------------------ -- ---- 1210: Sep bonds were up 2/32 at midsession, bouncing a bit but still within the day's range. Traders said the floor was quiet, with many people leaving for the day at noon. "'When it's quiet, buy it' is our adage," one trader said. He said he expected volume for the day at around 70,000 to 80,000 contracts. Among players, Morgan Stanley sold 1,000 Sep bonds.

1000: Credit futures trimmed losses in quiet trading. Bearish traders were frustrated that the market didn't find additional followthrough selling when Friday's lows were taken out. Traders said sentiment still remained too bullish, which is an anchor on the market. They also said general press reports over the weekend had a decidedly bullish tone, which was a contrarian warning sign. Smith Barney bought 5,000 Sep 10-year notes and 2,000 Sep bonds. Goldman Sachs and Merrill Lynch each sold 2,000 Sep 10-year notes. In eurodollars, FIMAT sold 2,000 Dec/Mar spreads at -5. Cantor bought 2,000 Sep 33 calls and Smith Barney bought 1,000 Sep 30 puts. Cantor also bought 2,000 Mar 25/40 strangles at 5.5.

0920: Sep bond futures were up 1/32 at 99 22/32, mostly on technical buying after players failed to push the market through key support at 99 12/32. As futures were mired in an 10-tick trading range, volatilities in options increased. Sep bond option volatility climbed to 9.65% from 7.45%, while Dec volatility increased 0.15 point to 9.25%. Sep 10-year volatility advanced to 6.00% from 4.80%, while Dec volatility rose 0.15 point to 6.00%. Major players reportedly included PaineWebber, which sold 2,000 Aug 100 bond calls at 15-12 and sold 2,000 Oct 99/100 call spreads at 22. ING bought 1,0000 Aug 98/99 1x2 bond puts at 5.

0750: Credit futures continued to edge lower in the wake of Friday's key reversal in Sep bonds. Traders cited further technical selling and worries about supply as the key bearish factors. Morgan Stanley sold 1,000 Sep bonds, while Goldman Sachs sold 1,000 Sep 10-year notes. Deutsche Bank bought 1,000 Sep 10-year notes, traders said. Support for Sep bonds was pegged at 99 11/32, with resistance at 100 25/32. Preliminary open interest in bonds jumped 11,090 contracts Friday to 440,011 on volume of 214,761. Open interest in 10-year notes fell 3,778 contracts to 613,089 on volume of 150,058. The rise in bond open interest on the reversal is technically bullish, but is clouded by the dip in 10-year note open interest.

0655: Sep bond futures were down 4/32 at 99 17/32 in Project A electronic trading. Treasuries are likely to continue to consolidate some of their recent gains this week, but the downside should be limited with the economic data expected to continue to point to steady Federal Reserve policy and with a big coupon payment this week. Participants said Friday's slide left the technical picture for Treasuries less rosy, and many expect the market to slide back toward the middle of its recent range after trading near the top of that range last week. Analysts are expecting a tame reading from the consumer price index report and in fact don't see any of the upcoming data changing market expectations for steady Fed policy this month. Monday's data aren't of

the magnitude to move prices significantly, limited to June business inventories, which are expected to rise 0.4%. Pivot point resistance was pegged at 100 6/32 and 100 24/32, with support at 99 9/32 and 99 29/32.

On the calendar (CT): --0730: June business inventories (May: inventories +0.8%, sales +1.0%; Forecast: inventories +0.6%) --About 1030: Treasury announces results of auctions of $21.0 bln in 37-day cash management bills --About 1230: Treasury announces results of auction of $18.0 bln in 13- & 26-week bills (Previous: 13-wk accepted yield 6.095%, 26-wk 6.060%) --Democratic National Convention formally opens in Los Angeles

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