CREDIT : Strong Start Fizzles; Bond Prices Retreat

Bond prices declined in moderate trading Tuesday after a short-lived rally earlier in the session sparked by a government report showing an improved U.S. trade picture.

The Treasury’s bellwether 30-year bond closed down a point, or $10 per $1,000 face amount. Its yield climbed to 9.21% from 9.11% late Monday. The closely watched issue rose as much as $13.75 after the trade report was issued.

The Commerce Department report said the nation’s trade gap shrank more than $4 billion in March to $9.75 billion, the lowest monthly deficit in three years. U.S. producers sold a record amount of goods overseas in March, slicing by 29.5% the February export deficit of $13.83 billion.

Sung Won Sohn, chief economist for Norwest Corp. in Minneapolis, said the news inspired the early bond market rally, but prices dropped as traders began to look more closely at the statistics.

He said the market viewed the 23% jump in exports--to an all-time high of $28.97 billion--as a sign that the economy could overheat and intensify inflationary pressures.

Inflation erodes the value of fixed-income investments and tends to drive up interest rates.

Adding to the inflation worries was another government report Tuesday showing that U.S. industry operated at 82.7% of capacity in April, the highest level in more than eight years.

Indexes Slip

In the secondary market for Treasury bonds, prices of short-term governments fell between 1/8 point and point, intermediate maturities were 5/16 point to 5/8 point lower and long-term issues ranged from 1 point to 1-3/16 point lower, according to Telerate Inc., a financial data service.

The movement of a point is equivalent to a change of $10 in the price of a $1,000 bond.

The Merrill Lynch daily Treasury index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, fell 0.56 to 108.93. The Shearson Lehman Hutton daily Treasury bond index, which makes a similar measurement, stood at 1,140.57, down 5.31.

In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds was down 3/8 point at 87 5/8 as of 3 p.m. EDT. The average yield rose to 8.16% from 8.13% late Monday.

Yields on three-month Treasury bills were up 3 basis points to 6.30%. Six-month bills rose 5 basis points to 6.54%, and one-year bills were up 6 basis points at 6.88%. 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 7.313% on Monday.

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