CREDIT : Bond Prices Drop, Despite Response to Dollar’s Rally

Bond prices moved lower Tuesday, but finished above their lows of the session in response to the dollar’s rally in foreign exchange following President Reagan’s statement in support of the currency.

The bellwether 30-year Treasury bond, down about a point at the opening, finished the day off about 15/32 point, or nearly $5 per $1,000 in face value. The yield on the issue rose to 8.88% from 8.85% late Monday.

Trading was relatively quiet. The government will be closed Wednesday for Veterans Day observances, shutting down the cash Treasury market and slowing activity in the rest of the credit markets, analysts said.

Depressing bonds on Tuesday were further steep declines in the dollar’s value against foreign currencies in overseas and early U.S. trading.

Bond investors are concerned that a weak dollar will cause higher inflation--thereby eroding the value of fixed-income securities--by making imports more expensive. They also worry that it will make dollar-denominated bonds less attractive to foreigners.

But the dollar rallied after Reagan was quoted as saying that the currency had fallen enough and that his Administration was not doing anything to bring it down. The statements contradicted published reports quoting unnamed Administration officials as saying that the White House wanted the dollar to drift lower.

The dollar closed at a new record low of 133.65 yen Tuesday in Tokyo, and was off against most major currencies in European trading. But the dollar rebounded in New York following the President’s statements to finish at about 134.55 yen, up from late Monday’s 134.18 yen.

Although analysts said it was unclear that Reagan’s off-the-cuff remarks signaled a shift in U.S. policy, the bond market rallied off its lows nevertheless.

“I think the indication from the Administration that the dollar was not to be desired in a free-fall was a positive step,” said Robert Chandross, chief economist at the New York office of Lloyds Bank PLC.

In the secondary market for Treasury bonds, prices of short-term governments fell about 1/32 point, intermediate maturities were off in the range of 1/32 point to 11/32 point, and 20-year issues were down 3/8 point, according to figures provided by the investment firm Salomon Bros.

The movement of a point is equivalent to a change of $10 in the price of a bond with a $1,000 face value.

Among corporate issues, utilities and industrials were unchanged in light trading.

Municipal bond prices were not available.

Yields on three-month Treasury bills were down 3 basis points to 5.67%. Six-month bills were unchanged at 6.18% and one-year bills were down 3 basis points at 6.44%. A basis point is one-hundredth of a percentage point.

The federal funds rate, the interest on overnight loans between banks, traded at 6.875%, up from 6.75% late Monday.

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