FINANCIAL MARKETS : CREDIT : Bonds Soar on Signs Economy May Be Cooling

Bond prices rocketed Friday, swept upward by new evidence that the economy is not overheating and by relief over the Treasury’s successful quarterly auction of new securities.

The Treasury’s benchmark 30-year bond climbed 1 3/4 points, or about $17.50 per $1,000 in face value. Its yield tumbled to 8.66% from 8.83% late Thursday.

The rally reflected a marked change in market psychology. Only two weeks ago, yields on 30-year Treasury bonds climbed past 9% because of worries that the economy and inflation were advancing at such a rapid clip that the Federal Reserve would push interest rates higher.

But in the past six sessions, a series of new government reports persuaded many traders that the economy is growing only moderately and that inflationary pressures are subsiding.

“The markets have had a fairly remarkable six days,” said Steven A. Wood, economist for BankAmerica Capital Markets Group in San Francisco.

Friday’s rally came a day after the government’s three-day quarterly refunding was completed. A record $30.5 billion in new notes and bonds were auctioned to finance government operations.

In when-issued trading, the yield on the Treasury’s new 30-year bond tumbled to 8.64% from an average of 8.84% at auction Thursday.

Trading was described as fairly active Friday after the government released a pair of economic reports that indicated the Federal Reserve will not be inclined to raise interest rates, which would erode the value of bonds.

The Labor Department reported that wholesale prices edged down 0.3%. Many analysts had expected a 0.2% increase.

Separately, the Commerce Department said retail sales fell a steep 0.6% in April.

The reports appeared to verify conclusions about the economy that traders drew from last Friday’s April employment report, which showed lower-than-expected job creation and wage inflation.

In the past three trading days, the Treasury found investors enthusiastic about buying new three-year and 10-year notes and 30-year bonds, evidently in an effort to lock in current yields because they expect rates to fall.

Wood said he thinks that there is room for further rate declines next week when the government reports on industrial production and consumer prices for April.

But other analysts warn that the market has gained so much ground so quickly that a reversal could lie ahead.

The federal funds rate, the interest rate banks charge each other on overnight loans, was 8.1875%, unchanged from late Thursday.

CURRENCY Dollar Falls Against Yen, British Pound The dollar went into a tailspin against the Japanese yen Friday as investors reassessed the health of the Japanese and U.S. economies.

The yen’s dramatic advance began overnight in Tokyo, where record-setting trading volume signaled that investor confidence in Japan’s economy was being renewed.

The yen’s advance was hastened later in the United States on fresh government reports indicating that the economy is weakening and inflation is being curbed. But by the close of domestic trading, the dollar had recovered against all currencies except the yen and the British pound.

Nearly $22 billion worth of yen changed hands Friday in Tokyo, more than double an average day’s volume of $8 billion to $9 billion, said James McGroarty, senior vice president at Greenwich Capital Markets Inc. in Greenwich, Conn.

As the yen soared, the dollar spiraled down. In Tokyo, the dollar closed at 154.15 yen, off 2.60 yen from Thursday. It fell further in London--to 153.75 yen--and closed at 152.70 yen in New York, off sharply from late Thursday’s 156.50 yen.

Friday’s trading in New York represented a 3.5% drop from a week earlier, when the dollar traded at about 158.30 yen.

Other late dollar rates in New York, compared to Thursday’s late rates, included: 1.6378 West German marks, up from 1.6325; 1.3995 Swiss francs, up from 1.3915; 5.5295 French francs, up from 5.5115; 1,207.75 Italian lire, up from 1,202.75, and 1.1758 Canadian dollars, up from 1.1703.

COMMODITIES Crop Figures Spark Grain, Bean Selloff Grain and soybean futures prices closed mostly lower Friday on the Chicago Board of Trade as traders reacted negatively to Agriculture Department crop figures.

On other markets, precious metals futures were lower, livestock prices were mostly higher, pork was mixed, and energy prices fell.

Wheat settled 1/2 cent to 5 1/2 cents lower, with the contract for May delivery at $3.81 1/2 a bushel; corn was 1 3/4 cents lower to 3 1/2 cents higher, with May at $2.87 1/2 a bushel; oats were 5 1/2 cents to 6 1/4 cents lower, with May at $1.60 a bushel, and soybeans were 14 1/2 cents to 17 1/2 cents lower, with May at $6.32 a bushel.

Traders gave a bearish interpretation to the Agriculture Department figures.

The department estimated winter wheat production at a nine-year high of 2.09 billion bushels. That was up 44% from last year’s drought-reduced harvest of 1.45 billion bushels.

This year’s corn harvest was projected at 8.1 billion bushels and soybean production at 1.92 billion bushels.