CREDIT : Concerns of Inflation Weaken Bond Prices

Bond prices dropped Friday in active trading, pressured by resurgent anxiety about inflation.

The losses were steepest in longer-maturing issues.

The Treasury’s closely watched 30-year bond tumbled about 1 1/2 points, or $15 for every $1,000 in face amount. Its yield, which moves inversely to its price, soared to 8.67% from 8.53% late Thursday.

The retreat reversed a brisk increase on Thursday, inspired by a government report on the U.S. merchandise trade deficit for January, which pushed the 30-year bond up about $7.50 per $1,000.

Analysts said bond prices were weakened by unconfirmed reports that the Federal Reserve is concerned about a possible reigniting of inflation, which erodes the value of fixed-income securities such as bonds. Also, oil prices continued to rise Friday, signaling a possible recurrence of inflation.

On the New York Mercantile Exchange, contracts for April delivery of West Texas Intermediate, the benchmark U.S. crude oil, jumped 30 cents to $16.58 per 42-gallon barrel.

“The bond market got hit pretty hard,” said Jay Goldinger, a principal of Capital Insight Inc., an investment firm in Beverly Hills. “The market’s scared of its shadow right now, and so it’s running.”

In the secondary market for Treasury bonds, prices of short-term government issues declined 3/16 point to 9/32 point, intermediate maturities fell 3/8 point to 13/16 point and 20-year issues dropped about 1 5/16 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, was down 0.59 at 112.34. The Shearson Lehman Treasury bond index, which makes a similar measurement, dropped 7.17 to 1,175.03.

In the municipal bond market, the bond buyer index of 40 actively traded general obligation and revenue bonds fell 3/8 point to 88 15/32. The average yield rose to 8.11% from 8.07% Thursday.

Yields on three-month Treasury bills, meanwhile, jumped 13 basis points to 5.69%. A basis point is one-hundredth of a percentage point. Six-month bills advanced 12 basis points to 5.84% and one-year bills rose 8 basis points to 6.26%.

The federal funds rate, the interest on overnight loans between banks, was quoted late in the day at 6.375%, down from 6.438% Thursday.