CREDIT : Bond Prices Fall as U.S. Begins Securities Auction

Bond prices fell and interest rates pushed higher Tuesday as the federal government began this week’s three-part, $26-billion securities auction.

The price of the Treasury’s 30-year bond fell 3/16 point, or about $2 for every $1,000 face amount. Its yield rose to 9.18%, its highest level in nearly five months, from 9.16% late Monday.

The last time the bellwether issue yielded that much was when it was 9.2% in mid-December.

The Treasury securities auctions are being held against a backdrop of speculation that the Federal Reserve may be tightening credit conditions in an effort to head off another round of inflation.

Worries about inflation have intensified in recent weeks as the economy continues to show surprising strength, as was evident in last week’s report that the unemployment rate had fallen to a 14-year low of 5.4%.

In the first stage of the auctions, the Treasury sold $8.75 billion in three-year notes at the highest yields since last November.

The average yield on three-year Treasury notes rose to 8.23%, up from 7.42% at the last auction in February and the highest since three-year notes averaged 8.74% at the November auction.

Elliott Platt, director of economic research for Donaldson Lufkin & Jenrette Securities, said the auction “was a touch disappointing.” He said the market had expected the notes would go for an average yield of about 8.20%, but that there was insufficient demand at that level.

The federal funds rate, the interest charged on short-term loans between banks, rose to 7.25% from 7.125%.

In the secondary market for Treasury bonds, prices of short-term governments fell 1/16 point, intermediate maturities fell by between 5/32 point and 5/16 point and 20-year issues fell 5/32 point, according to Telerate Inc.

In the tax-exempt market, prices of municipal and revenue bonds rose 1/16 point.

Yields on three-month Treasury bills gained 4 basis points to 6.33%. Six-month bills fell 3 basis points to 6.48%, and one-year bills rose 2 basis points to 6.88%.

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