CREDIT : Bond Prices Skid; Inflation Fears Blamed

Bond prices tumbled Friday on a combination of inflation and interest rate worries, pushing long-term interest rates above 9% again and more than erasing a big price rise earlier in the week.

Prices of the Treasury’s closely watched 30-year bond dropped 1 points, or $12.50 for every $1,000 in face value. More than half of the decline occurred in very light activity in the afternoon session, analysts said.

Over the past three trading sessions, the price of the long bond has fallen about $30, more than offsetting the $21 gain it made Tuesday on news of a narrower U.S. trade deficit in April.

As prices fell Friday, the 30-year bond’s yield rose to 9.09% from 8.98% late Thursday. Yields had fallen to 8.81% on Tuesday. Last week, the long bond’s yield finished at 9.04%.

Analysts said the latest decline in prices reflected a continuation of the market’s reappraisal of the outlook for interest rates and inflation.

“People are looking at the economy more closely,” said Harold Nathan, economist for Wells Fargo & Co. “The economy still remains robust and strong enough to generate inflation.”

Nathan said the market’s mood is so sour that it shrugged off a Commerce Department report Friday that housing construction plummeted 12.2% in May, the steepest drop in five months.

A report indicating economic weakness is usually seen by bond traders as an encouraging development because it indicates there may be weaker demand for credit and less inflationary pressure. Stronger credit demand pushes interest rates higher and bond prices lower, while inflation erodes bond values.

Expects Higher Rates

Robert Chandross, chief economist for Lloyd’s Bank in New York, said the market is preoccupied with speculation that the West German central bank may tighten its monetary policy, and that other central banks may follow its lead in encouraging higher interest rates.

He expects rates to “work higher over the next few months,” with yields on 30-year Treasury bonds approaching 10% by the end of September.

Nathan of Wells Fargo said he also believes that the trend in interest rates is upward, and expects the long bond could yield 9.75% by late August.

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

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 Shearson Lehman Hutton daily Treasury bond index, which measures prices of all Treasury issues with maturities of a year or longer, fell 6.47 to 1,144.02.

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

Yields on three-month Treasury bills rose 8 basis points to 6.37%. Six-month bills rose 10 basis points to 6.70% and one-year bills rose 10 basis points to 7.02%. A basis point is one-hundredth of a percentage point.

The federal funds rate, the interest on overnight loans between banks, was quoted late in the day at 7.438%, down from 7.50% late Thursday.