CREDIT : Bond Prices Rally as Fears of Higher Inflation Recede

Interest rates tumbled Tuesday, especially for longer-maturing bonds, as investors felt more confident about the inflation outlook with the sharp drop in prices of oil and other commodities.

The drop in interest rates, and the accompanying rise in bond prices, was the biggest since shortly after the Oct. 19 stock market crash, when shellshocked investors flocked to the credit markets for safer investments.

The Treasury’s bellwether 30-year bond ended the session 1.375 point higher, or about $13.75 per $1,000 in face amount. Its yield sank to 9.20% from 9.37% late Monday.

Elliott Platt, a research director for Donaldson Lufkin & Jenrette Securities, attributed Tuesday’s rally, albeit in thin trading, to a sharp decline in commodity prices, particularly oil and gold.

The failure of the 13-nation Organization of Petroleum Exporting Countries to limit its production knocked down oil prices to below $17 a barrel for the first time since March. And that helped bring down gold prices.

But it was good news for the credit markets because it lessened the possibility of higher inflation, which erodes the value of fixed-income securities. Those fears had been largely responsible for the weakness in bond prices and soaring interest rates that highlighted much of the year.

In the secondary market for Treasury bonds, prices of short-term governments rose between 7/32 point and 9/32 point, intermediate maturities were 3/8 point to a point higher and 20-year issues gained 1.375 point, according to figures provided by Telerate Inc., a financial information service.

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

The Merrill Lynch daily Treasury index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, rose 0.75 to 109.36. The Shearson Lehman daily Treasury bond index, which makes a similar measurement, rose 8.43 to 1,145.07.

In corporate trading, industrials were up 1.25 point and utilities rose a point in moderate to active trading, according to the investment firm of Salomon Bros.

Yields on three-month Treasury bills fell 5 basis points to 5.94%. Six-month bills were down 2 basis point at 6.42% and one-year bills were down 8 basis points at 6.72%.

A basis point is one-hundredth of a percentage point.

The federal funds rate, the interest on overnight loans between banks, traded at 6.75%, up from 6.688% late Monday.

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