Bond prices tumbled Wednesday as inflation worries were stirred by a sharp rise in commodity prices.
The Treasury's key 30-year bond fell 1 1/2 points, or about $15 for every $1,000 in face value, as its yield rose to 8.99% from 8.86% Tuesday.
The bond market rallied in the first two sessions of the new year in tandem with the strengthening dollar, whose advance in the foreign exchange markets had tended to allay fears that inflation would accelerate.
The dollar posted gains again Wednesday in foreign exchange trading but finished below the day's highs.
William V. Sullivan Jr., director of money market research for Dean Witter Reynolds, said the dollar's pullback "served as a catalyst for a reversal in Treasury prices" that had moved higher early in the day.
In addition, futures prices for grains and precious metals rose sharply, pushing up the closely watched Commodity Research Bureau's futures index.
"There was a sizable move in the CRB index, and that prompted fears the economy was strong and inflation is lurking in the wings," Sullivan said.
Inflation erodes the value of fixed-income investments, and Sullivan said the commodity price rise triggered some active selling in bonds.
He said the rise in commodity prices was worrisome because it occurred even as the dollar rose. "It suggests demand is moving them, and if demand pressures are building that could spell trouble," he said.
Meantime, the Treasury sold $6.51 billion in seven-year notes at an average yield of 8.67%, down from 9.51% at the last auction on Oct. 7.
It was the lowest rate at such an auction since seven-year notes averaged 8.10% on June 25.
In the secondary market for Treasury bonds, prices of short-term governments fell 6/32 point; intermediate maturities fell 1/2 point, and 20-year issues fell 1 points, according to Telerate Systems Inc., the 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, fell 0.56 to 110.27. The Shearson Lehman daily Treasury bond index, which makes a similar measurement, fell 6.31 to 1,153.85.
Yields on three-month Treasury bills fell 4 basis points to 5.86%. Six-month bills rose 1 basis point to 6.38%, and one-year bills rose 3 basis points to 6.68%. 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%, down from 7.25% Tuesday.
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