CREDIT : Bond Prices Sag in Early Trading but Close Mixed

Prices of long-term Treasury bonds, which slumped in early trading after a disappointing trade deficit report, recovered Tuesday to finish moderately higher. However, short-term issues fell.

The government’s bellwether 30-year bond was down point at midday but ended the session up 9/32 point, or about $2.85 for every $1,000 in face value.

Its yield, which moves inversely to its price and is often an indicator of interest rate trends, fell to 9.41% from 9.43% late Monday.

The Commerce Department’s report on the June trade deficit initially sent bond prices lower and the dollar tumbling on foreign exchange markets.

The department said the deficit surged to $12.5 billion, sharply higher than the revised May imbalance of $9.8 billion. The June results, which followed three consecutive months of improving trade figures, were the worst shortfall since February’s $14.4-billion deficit and were higher than the financial markets had expected.

Disappointing trade figures tend to depress bond prices because of the toll they take on the dollar. When the dollar is lower, the pace of inflation quickens and traders believe that the Federal Reserve Board will respond by nudging interest rates higher.

But the dollar reversed course Tuesday and the longer end of the bond market followed.

Kevin Flanagan, a money market economist with the investment firm Dean Witter Reynolds Inc., said speculation that the Fed would tighten credit heartened long-term bondholders, who don’t want to see the value of their investments eroded by inflation.

But shorter-term bonds, more sensitive to interest rate changes, fell.

Investments Shift

Prices of short-term government issues were 1/32 point to 1/8 point lower, intermediate maturities ranged from 3/32 point lower to 1/32 point higher, and 20-year issues were up point, according to figures provided by Telerate Inc., a financial 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.

Flanagan said some of the decline at the lower end of the market was due to a flow of cash from bonds to stocks as Wall Street recovered from its plunge on Monday.

The Shearson Lehman daily Treasury bond index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, was down 0.15 at 1,124.25.

Corporate bonds also slipped. Moody’s investment grade corporate bond index, which measures price movements on 80 corporate bonds with maturities of five years or longer, edged up 0.31 to 280.54.

Prices were little changed in the municipal bond market. The Bond Buyer municipal bond index, which measures changes on 40 issues, was unchanged at 88 10-32, while its yield edged up to 8.18% from 8.15% late Monday.

Fed Funds Decline

Three-month Treasury bills rose 3 basis points to a discounted rate of 7.07% and a yield of 7.29%. Six-month bills rose 6 basis points to a discounted rate of 7.56% to yield 7.96% while one-year bills gained 5 basis points at 7.73% and a yield of 8.27%.

A basis point is one-hundredth of a percentage point. The yield is the annualized return on an investment in a Treasury bill. The discounted rate is the interest rate the market uses to price bills.

The federal funds rate, the interest on overnight loans between banks, was quoted at 8.125%, down from 8.375% late Monday.

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