CREDIT : Bond Prices Drop, Given a Push by Falling Dollar

Bond prices finished the year mostly lower Thursday, following the dollar in its downward spiral as they have for much of 1987.

Prices of many bonds finished at their lows of the day, with the declines steepest in long-term issues.

The Treasury’s key 30-year bond dropped 7/8 point, or $8.75 for every $1,000 in face value. Its yield, which moves inversely to its price, jumped to 8.98% from 8.89% late Wednesday.

Yields on short-term issues fell.

The decline in bond prices was amplified by the thinness of the pre-holiday market, traders said. Trading ended several hours earlier than normal.

Traders said bond prices came under a renewed onslaught from the dollar, which plunged 1.5 yen Thursday to its 11th new closing low in 17 trading days against the Japanese currency. The decline occurred despite the Bank of Japan’s strenuous effort to check it by buying dollars in the open market.

“The dominant influence was the sharp decline in the dollar’s value,” said William Sullivan, director of money-market research for Dean Witter Reynolds. “The prevailing sentiment is that the dollar is going to erode further.”

A falling dollar erodes the value of dollar-denominated instruments like bonds and notes, making them less attractive to foreign investors. By making imports more expensive, it fans fears of inflation--a key enemy of the bond market that also eats away at fixed-income investments.

Traders said the market was unaffected by the government’s report that orders to U.S. factories for manufactured goods edged up a tiny 0.1% in November, the poorest showing in three months.

In the secondary market for Treasury bonds, prices of short-term government issues declined 1/8 point to 3/16 point, intermediate issues fell 5/16 point to 23/32 point and 20-year issues lost a full point, according to Telerate Inc., the financial information service.

The movement of a point equals 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, slipped 0.41 to 110.36. The Shearson Lehman Treasury bond index, which makes a similar measurement, fell 4.24 to 1,154.88.

Yields on three-month Treasury bills, meanwhile, fell 7 basis points to 5.67%. Six-month bills slipped 1 basis point to 6.15%, but one-year bills rose 3 basis points to 6.62%. A basis point is one-hundredth of a percentage point.

The federal funds rate, the interest on overnight loans between banks, was quoted at 7%, up from 6.75% late Wednesday.