CREDIT : Bond Prices Retreat as Traders Look to Auction

Long-term interest rates drifted to their highest levels of the year Monday as bond prices edged lower and investors awaited the start of a $26-billion round of borrowing by the federal government.

The price of the Treasury’s closely watched 30-year issue slipped 1/16 point, or about 62.5 cents per $1,000 face amount, as its yield edged up to 9.16% from 9.15% on Friday.

That was the highest rate on the bellwether bond since mid-December, when the 30-year issue yielded about 9.2%.

Analysts said concerns about the upcoming note and bond auctions, which span three days starting today, kept many investors on the sidelines.

They said bond traders also suspect that the Federal Reserve may be about to tighten credit conditions in an effort to choke off inflation.

Worries about inflation have intensified in recent weeks as the economy continues to show surprising strength.

The latest evidence on that score came in last Friday’s government report that said the unemployment rate had fallen to a 14-year low of 5.4%.

Adding to those fears Monday was a rise in the federal funds rate, the interest charged on short-term loans between banks, to 7.125% from 6.875% Friday.

The federal funds rate is viewed as an important indicator of the Fed’s intentions on monetary policy since the central bank has the ability to influence the availability of those funds.

“They may have already tightened,” said Maria Ramirez, an economist for the investment firm Drexel Burnham Lambert.

In the secondary market for Treasury bonds, prices of short-term governments were off 1/16 point; intermediate maturities fell 1/8 point, and 20-year issues fell 3/32 point.

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