CREDIT : Rising Oil Prices, Weaker Dollar Push Bonds Down

Bond prices generally declined in quiet trading Tuesday, pressured by a sharp upward spike in oil prices.

The Treasury’s 30-year issue, which on Monday lost about a point, or $10 for every $1,000 in face amount, fell an additional $3 or so per $1,000 in Tuesday’s trading. Its yield rose to 9.04% from 9.01% late Monday.

Oil prices rocketed higher in reaction to reports of new hostilities in the Persian Gulf and suggestions that some OPEC producers may restrict their oil production.

On the New York Mercantile Exchange, contracts for February delivery of West Texas Intermediate, the benchmark U.S crude oil, closed at $16.61 per 42-gallon barrel, up $1.21 from Monday’s close.

“The suddenness of the (oil price) reversal might have discouraged some potential bond investors today,” said Marshall Front, an economist at the Chicago investment firm of Stein, Roe & Farnham. “The dollar’s weakness also did not help.”

Rising oil prices are an enemy of the bond market since they often signal inflationary pressures, which erode the value of fixed-income securities. And a weak dollar makes U.S. bonds and notes less attractive to foreign investors.

The decline in bond prices was intensified by slack holiday trading and the prospect that business would not intensify until after New Year’s Day, dealers said.

In the secondary market for Treasuries, prices of short-term government issues fell 1/8 point to 5/32 point; intermediate maturities lost 3/16 point to 11/32 point, and long-term issues were down point, Salomon Bros. said.

The Shearson Lehman Treasury index, which measures price movements on outstanding Treasury issues with maturities of a year or longer, fell 1.76 to 1,150.58.

In corporate trading, industrials declined point and utilities slipped 1/8 point in light dealings. Moody’s investment grade corporate bond index, which measures price movements on 80 corporate bonds with maturities of five years or longer, fell 0.31 to 265.91.

Yields on three-month Treasury bills, meanwhile, fell 5 basis points to 5.90%. Six-month bills edged down 1 basis point to 6.46%, and one-year bills rose 3 basis points to 6.73%.

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

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