CREDIT : Bonds Gain as Britain Lowers Interest Rates

Britain’s decision to cut interest rates helped provide a shot in the arm to the sagging credit markets Friday, as bonds posted solid price gains and yields fell in response.

The biggest increases were found in longer maturing issues. The Treasury’s closely watched 30-year bond, which on Thursday lost about point, or $2.50 per $1,000 face amount, finished up $10.625 in moderately active trading.

Its yield, which moves inversely to its price, tumbled to 8.68% from 8.77%. At the end of trading last week the yield had stood at 8.75%.

Robert H. Chandross, chief economist at the North America office of Lloyds Bank PLC, said several factors contributed to the rally, including the interest rate decline in Britain.

Relieves Fed

Major British commercial banks, heeding a signal from the Bank of England, announced a cut in their base lending rate by half a percentage point to 8%, the lowest level in more than a decade.

The government there had been concerned about the strength of the pound, which was buoyed by Britain’s relatively high interest rates. The higher rates made pound-denominated investments more attractive, stimulating demand for the currency.

But at the same time, it depressed the dollar’s value and made dollar-denominated bonds and notes less attractive to foreign investors. A falling dollar also raises the prospect of import-led inflation.

Britain’s rate-cutting decision takes the pressure off the Federal Reserve to tighten its credit policies, thereby driving up interest rates, Chandross said.

“There may be some relief that the Fed has not tightened monetary policy more than they appeared to have,” he added, noting that bond prices had been hurt earlier in the week due to those fears.

William Brachfeld, executive vice president at Daiwa Securities Inc., also attributed the rebound largely to technical factors stemming from the dollar.

Investors who had been betting on a decline in the credit markets bought bonds to cover their short positions prior to next week’s meeting among the seven biggest industrial nations, known as the Group of Seven, he said.

Analysts speculate that the Group of Seven will push for currency stabilization, thereby strengthening the dollar and bond prices.

In the secondary market for Treasury bonds, prices of short-term governments rose between 3/16 point and 9/32 point, intermediate maturities were 11/32 point to 5/8 point higher and long-term issues were up from 3/4 point to 1 point, according to figures provided by Telerate Inc.

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, rose 0.46 to 111.93. The Shearson Lehman daily Treasury bond index, which makes a similar measurement, was up 4.66 to 1,170.95.

In corporate trading, industrials and utilities rose about 1/2 point in active trading, according to the investment firm of Salomon Bros.

In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds was up 9/16 point at 88 23/32 as of 3 p.m. EST. The average yield fell to 8.09% from 8.14%.

Yields on three-month Treasury bills were down 2 basis points to 6.01%. Six-month bills fell 1 basis point to 6.17% and one-year bills were off 6 basis points at 6.50%. A basis point is one-hundredth of a percentage point.

The federal funds rate, the interest on overnight loans between banks, traded at 6.75%, down from 6.875% on Thursday.