CREDIT : Inflation Fears Drive Prices of Bonds Lower

Inflation fears intensified in the bond market Monday, driving down prices and pushing long-term Treasury yields above the 9% barrier for the first time in three months.

The key 30-year Treasury bond, an important barometer of interest rate trends, fell 3/4 point, or $7.50 per $1,000 in face amount. The yield, which moves inversely to price, rose to 9.01% from 8.94% on Friday. It was the highest yield since mid-January.

“Bond investors are having nightmares. They come in the morning and there’s nothing but bad news,” said Jay Goldinger, head of Capital Insight Inc., a Beverly Hills-based investment firm.

He said the inflationary combination from an unexpected bulge in the February trade deficit, higher wholesale prices in March and rising oil prices was like “being in the ring and getting a left-hook, a right punch and one to the stomach. The bond market is staggering.”

Oil prices rose sharply Monday after U.S.-Iranian fighting was reported in the Persian Gulf, raising more anxiety about inflation. Oil prices fell back late in the day but bond prices didn’t recover.

Inflation frightens bondholders because it erodes the value of their investment.

In the secondary market for Treasury bonds, prices of short-term governments fell about point, intermediate maturities fell 1/2 point and long-term issues fell 3/4 point, the Telerate Inc. financial information service said.

The movement of a point equals 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 0.36 to 110.47. The Shearson Lehman Hutton daily Treasury bond index, which makes a similar measurement, fell 3.54 to 1,155.52.

In corporate trading, industrials and utilities fell about point in light dealings.

Among tax-exempt municipal bonds, general obligations and revenue bonds fell about 1/2 point. Trading was light.

Yields on three-month Treasury bills fell 3 basis points to 5.86%. Six-month bills fell 1 basis point to 6.22% and one-year bills rose 6 basis points to 6.63%. 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%, up from 6.675% late Friday.