CREDIT : Bonds Retreat Along With Stocks

Bond and stock prices both dropped sharply Thursday after the government reported an unexpected widening in the U.S. trade deficit, reversing course after a series of declines. Bonds recovered some lost ground later in the day.

Long-term yields moved higher, but some short-term interest rates fell as investors worried by the steep stock market decline sought the relative safety of Treasury issues.

The stock market’s Dow Jones industrial average tumbled 101.46 points to 2,005.64, the fifth-steepest single-day fall in history. The 4.8% drop was the biggest since Jan. 8, when the blue chip indicator fell 140.58 points.

The Treasury’s 30-year bond ended the day down a full point, or $10 for every $1,000 in face value. The issue, viewed as a bellwether for the credit markets, careened 2 points lower shortly after the trade report was released.

The 30-year bond’s yield rose to 8.86% from 8.73% late Wednesday.

But some short-term rates fell. Yields on three-month Treasury bills, for instance, slid to 5.72% from 5.83% late Wednesday.

Bond prices skidded immediately after the Commerce Department reported the nation’s trade deficit widened to $13.8 billion in February, its biggest shortfall since October. Most analysts expected the gap to narrow.

A wider deficit suggests that the dollar may have to fall further to reduce the trade gap. A falling dollar makes dollar-denominated securities less attractive to foreign investors, who have been major buyers of Treasury bonds.

“The bond market was in a state of shock when the number (was) printed,” said Elliott Platt, research director for the investment firm Donaldson Lufkin Jenrette Securities Inc.

But later in the day, bond prices retraced some lost ground as stock prices fell. Platt said that, as the stock market’s decline deepened, some traders decided to buy bonds, on which yields were becoming more attractive compared to stocks.

The Dow Jones industrial average closed down 101.46 points.

Platt said yields on three-month Treasury bills fell because demand surged for the government-backed instruments, which are viewed as secure and can be easily converted into cash. The phenomenon, known as a “flight to quality,” often occurs in times of financial uncertainty.

In the secondary market for Treasury bonds, prices of short-term issues fell point, intermediates slipped by between point and 1/2 point and 20-year governments dropped 1 3/8 points, according to the financial information service Telerate Inc.

The Merrill Lynch daily Treasury index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, fell 0.46 to 111.30. The Shearson Lehman composite index, which makes a similar measurement, fell 6.21 to 1,162.82.

Moody’s investment grade corporate bond index, which measures price movements on 80 corporate bonds with maturities of five years or longer, slid 2.52 to to 279.88.

Yields on six-month Treasury bills fell 2 basis points to 6.02%, but one-year bills rose 4 basis points to 6.46%. A basis point is one-hundredth of a percentage point.

The federal funds rate, the interest on overnight loans between banks, was quoted at 6.88%, up from 6.675% on Wednesday.

In the tax-exempt market, the Bond Buyers municipal bond index that measures prices on 40 long-term bonds fell 25/32 point to 87 29/32 while its yield rose to 8.17% from 8.09%.

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