1CREDIT : Bonds Drop as Traders See Tightening by Fed

Bond prices fell Thursday and short-term interest rates jumped as traders said it appeared the Federal Reserve was tightening credit conditions in an effort to ease inflationary pressures.

The Treasury’s benchmark 30-year bond lost 3/16 point, or $2 per $1,000 face amount, while its yield, which moves in the opposite direction from its price, rose to 9.14% from 9.12% late Wednesday.

The rise in interest rates was sharper among shorter-term government securities as traders said it appeared the Federal Reserve was taking steps to drain reserves from the banking system.

When the central bank makes such a move, it drives short-term interest rates higher as some banks must borrow to meet reserve requirements.

Longer-term rates did not move up as sharply, however, because traders felt that if the central bank is tightening credit, chances are it can bring inflation under control.

A late-afternoon move by Chase Manhattan Corp. to raise its prime rate half a percentage point to 11.5%, the second increase in two weeks, appeared to have little effect on the credit markets.

Steven A. Wood, economist for BankAmerica Capital Markets Group in San Francisco, said a report released earlier in the day of smaller-then-expected decline in durable goods orders in January also depressed the market.

Secondary Market Down

“A lot of the decline was concentrated in the defense category, while the factory sector still has plenty of momentum,” he said.

In the secondary market for Treasury bonds, prices of short-term governments fell 5/32 point, intermediate maturities fell 3/16 point and long-term issues were down 11/32 point, according to 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.

The Shearson Lehman Hutton daily Treasury bond index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, fell 2.48 to 1,120.18.

In corporate trading, industrials were down. Moody’s investment grade corporate bond index, which measures price movements on 80 corporate bonds with maturities of five years or longer, fell 0.95 to 295.95.