CREDIT : Interest Rate Jitters Scuttle Bond Prices

Bond prices plunged Thursday, pushing long-term interest rates back toward the 9% level.

Market watchers blamed worries that foreign central banks may be poised to push rates higher, combined with a new decline in the dollar and profit taking in the wake of the market’s abrupt and ferocious climb earlier in the week.

Prices of the Treasury’s closely watched 30-year bond fell 1.625 points, or more than $16 for every $1,000 in face value. On Tuesday, long bond prices climbed more than $20 on news of a narrower trade deficit in April.

As prices fell, the 30-year bond’s yield rose to 8.98% from 8.83% late Wednesday and 8.81% on Tuesday.

“People had their fingers on the trigger to sell at the first sign of a warning light,” said Elliott Platt, research director for the investment firm Donaldson Lufkin & Jenrette Securities Corp.

The warning light flashed overnight as a West German newspaper carried an unconfirmed report that the West German central bank may be ready to boost a key short-term lending rate.

Analysts said concerns have been expressed by West German authorities about inflation and the weakness of the mark in foreign exchange trading. A move to encourage higher rates there could address both of those problems.

Platt said the reports stirred some concerns in the United States that other central banks may also be about to tighten credit in tandem with the West German central bank.

“Higher rates in West Germany would weaken the dollar, and that might also be accompanied by a Fed tightening here,” Platt said.

Drives Dollar Down

Even without a tightening move by the Fed, analysts said a boost in rates overseas would diminish chances that the U.S. central bankers would encourage lower interest rates.

The West German report was cited for a sharp decline in the dollar in foreign exchange trading. The dollar’s decline hurts bond prices because it cuts the yields for foreigners who hold dollar-denominated investments, and foreigners have been important participants in the U.S. bond markets.

In the secondary market for Treasury bonds, prices of short-term government issues fell by between point and 1/2 point, intermediate maturities tumbled by between 5/8 point and 1 1/8 points and 20-year issues fell 1 3/4 points, according to figures provided by Telerate Inc., a business information service.

Drop in Tax-Exempt Market

The movement of a point is equivalent to 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 0.82 to 109.86. The Shearson Lehman Hutton daily Treasury bond index, which makes a similar measurement, fell 8.44 to 1,150.49.

In the tax-exempt market, prices fell about 3/4 point, according the Bond Buyers’ municipal bond index.

Yields on three-month Treasury bills fell 4 basis points to 6.29%. Six-month bills rose 6 basis points to 6.60% and one-year bills were up 9 basis points at 6.92%. A basis point is one-hundredth of a percentage point.

The federal funds rate, the interest on overnight loans between banks, was quoted at 7.50%, down from 8.25% on Wednesday.

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