CREDIT : Bonds Halt Slide, Though Rate Worries Remain

The bond market pulled out of a nose dive Tuesday after the government reported that consumer prices rose 0.4% in February, a figure that was at the low end of expectations.

Traders remained pessimistic, however, about the outlook for inflation and interest rates. While Treasury bonds rose, corporate and municipal issues continued to slip and the short-term Treasury bill market softened further.

After declining steeply in the previous two sessions, the Treasury’s benchmark 30-year bond rose 13/32 point, or $4.06 per $1,000 of face amount. The long bond’s yield fell to 9.28% from almost 9.33% late Monday.

“It was a very anemic response. People have begun to realize that inflation is going to be at least 5% to 6% this year, and the (Federal Reserve) is not going to ease credit soon,” Robert Chandross, an economist with Lloyds Bank PLC in New York, said.

The steep slide in the credit market began Friday, when the government reported that wholesale prices for finished goods rose 1.0% in February, identical to the rise in January.

Expectations that the Federal Reserve would tighten credit to cool inflation drove short-term rates sharply higher, above the level of long-term rates. Such a change in the usual pattern, known as an inversion of the yield curve, is sometimes an early warning of recession.

The Fed’s ability to drive up rates is limited, however, not only by the risk of recession but also because high rates could send the dollar sharply higher and aggravate the trade deficit, said Pat Britt, head of the capital markets group at Fulton Prebon (U.S.A.) Inc., a broker.

“They do not and cannot have a strong dollar,” Britt said.

The rise in the Labor Department’s consumer price index followed a 0.6% increase in January that had been the largest advance over one month within two years.

Even with the moderation in February, consumer prices in the past two months have risen at a compound annual rate of 6.1%, sharply higher than the 4.4% rate of increase for both 1987 and 1988.

In the secondary market for Treasury bonds, prices of short-term governments were unchanged to 3/32 point higher. Intermediate maturities rose 1/16 point to 5/32 point higher, and long-term issues were up 1/16 point to 1/4 point, according to Telerate Inc., the 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 one year or longer, rose 1.66, to 1,100.05.

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 0.08 to 295.20.

In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds fell 7/16 point. The average yield to maturity rose to 7.88% from 7.84%.

Yields on three-month Treasury bills rose to 9.42% as the discount rose 10 basis points to 9.09%. Yields on six-month bills rose to 9.64% as the discount rose 5 basis points, to 9.08%. Yields on one-year bills fell to 9.80% as the discount fell 6 basis points to 9.02%.

A basis point is 1/100 of a percentage point. The yield is the annualized return on an investment in a Treasury bill. The discount is the percentage by which bills are selling below the face value, which is paid at maturity.

Although there is speculation that the Federal Reserve will tighten credit by manipulating the federal funds rate higher, the Fed took no such action Tuesday. Federal funds, which are overnight loans between banks, were traded at 9.813%, unchanged from late Monday.