CREDIT : Economic Reports Lift Bond Prices

Interest rates fell sharply Friday, with the yield on the Treasury’s longest maturing bond reaching a two-month low after the government reported the nation’s trade deficit narrowed and inflation remained under control.

Both reports took Wall Street by surprise and were largely responsible for a powerful rally in bond prices, which subsequently sent most interest rates tumbling. Trading was described as fairly active.

The longest maturing bonds reaped the biggest gains. The bellwether 30-year Treasury issue soared 2 5/8 points, or $26.25 per $1,000 face amount. Its yield plunged to 8.75%--its lowest level since early November--from 9.02% late Thursday.

The Commerce Department said the trade gap fell to $13.2 billion in November, a 25% improvement over October’s record $17.6 billion and the lowest level in seven months. The report on inflation by the Labor Department said December wholesale prices declined 0.3%, the biggest monthly decline since the summer of 1986.

The trade picture concerns the bond market because a widening shortfall would put pressure on the dollar. And when the currency declines, it discourages foreigners from buying U.S. securities and raises prospects for inflation, which erodes the value of fixed-income securities.

The dollar soared in value Thursday, propelled by the unexpectedly bullish trade report, and that helped push up prices of debt securities.

“I think people were willing to make commitments, especially in the longer-term segments. They haven’t had that commitment in some time,” said Carol A. Stone, senior economist at Nomura Securities Inc.

The federal funds rate, the interest on overnight loans between banks, traded at 6.938%, up from 6.813% late Thursday.

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