CREDIT : Good News on Inflation Pushes Bond Prices Higher

Associated Press

Bond prices ended higher in light trading Monday after two government reports indicated that inflation may be slowing.

The Treasury’s closely watched 30-year bond advanced 13/32 point, or about $4 for every $1,000 in face value. Its yield, which moves in the opposite direction from its price and is often an indicator of interest rate trends, slipped to 8.86% from 8.90% late Friday.

The Federal Reserve reported that the operating rate at U.S. factories, mines and utilities fell a slight 0.2% in August to 83.6%.

The market interpreted the numbers to mean that there was more slack in the economy and more room to produce with less inflationary pressure, analysts said.


Bigger Inventories

A second report from the Commerce Department showing that business inventories rose 0.8% last month also helped prices. The report said business inventories rose 0.8% in August--the 20th consecutive monthly increase--while business sales rose 1.1%.

Positive Approach

The report could have been interpreted negatively because it suggested a higher gross national product and increased inflationary pressures, said Peter Greenbaum, a trader with Smith Barney, Harris Upham & Co.


However, the market took a positive approach.

“They decided it could be constructive for the bond market because it could mean we’re establishing conditions for slower growth down the road,” said William Sullivan, a senior vice president at Dean Witter Reynolds Inc.

Slower growth would mean a weakening of inflation, which erodes the value of fixed-income securities, such as bonds and notes. It could also mean a relaxing of credit by the Fed, which in turn would lead to lower interest rates.

Secondary Market Rises

Monday’s gains also came despite a rise in energy and precious metals prices, bond traders said.

In the secondary market for Treasury bonds, prices of short-term government issues were 1/32 point higher, intermediate maturities were 3/32 to 7/32 point higher, and long-term issues rose 11/32 point, according to figures provided by Telerate Inc., a financial information service.

The movement of a point equals 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 price movements on all outstanding Treasury issues with maturities of a year or longer, was up 1.24 at 1,151.52.


In corporate trading, industrial and utility bonds rose. Moody’s investment grade corporate bond index, which measures price movements on 80 corporate bonds with maturities of five years or longer, edged up 0.41 to 295.37.

Among tax-exempt municipal bonds, general obligations were unchanged at 7.85% and revenue bonds were up 1/8 point. Trading was moderate.

Yields on three-month Treasury bills, meanwhile, rose to 7.55% as the discount remained unchanged at 7.32%. Yields on six-month bills advanced to 7.79% while the discount rate was up 1 basis point to 7.41%. Yields on one-year bills rose to 8.04% and the discount rose 1 basis point to 7.51%.

A basis point is one-hundredth of a percentage point. The yield is the annualized return on an investment in a Treasury bill. The discount is the percentage that bills are selling below the face value, which is paid at maturity.

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