Bond Traders Dancing to a Different Tune : Finance: Faster business activity spurs a rally in government issues, as good news proves good for market segment.

Given the chance to wax poetic, traders like to tell how the bond market dances on the graveyard of the economy, gaining on grim economic reports and declining on the positive.

For years that unwritten rule more or less dictated how traders bought or sold government bonds in advance of expected economic news.

But this past month signs of faster business activity instead inspired an unexpected and powerful rally in the market for government bonds.

Defying a surge in consumer confidence, retreating unemployment and fewer jobless claims, the long bond’s yield has fallen more than 30 basis points since early November.

Now, some experts are wondering whether the poetic axiom needs revamping--whether some fundamental change may be at work in the $4-trillion market for Treasury securities.

“It’s a weird situation. I wish I could understand it,” said Nancy Kimelman, chief economist for Technical Data in Boston. “Maybe we do break the relationship between a good economy being bad for bonds, simply because this good economy wasn’t created by the Fed.”

Historically, traders have sold bonds on upbeat news because it seemed to decrease the chance the Federal Reserve would lower interest rates in order to stimulate economic growth. Lower interest rates in the economy would boost the value of existing fixed-income securities.

In addition, fast growth can be inflationary, and higher prices erode the value of fixed-income securities.

But a string of relatively healthy reports this month seemed to prod traders the opposite way. Two Fridays ago, in perhaps the most unexpected reaction, the Labor Department reported brisk job growth in November, along with a drop in the civilian unemployment rate from 7.4% the month before to 7.2%.

The report ultimately caused bonds to rally, instead of the wary reaction that many investors might have expected.

Part of the reason was that the news, like other reports this month, was viewed as moderating President-elect Clinton’s plans for measures to stimulate the economy. Such deficit spending would require the government to sell more bonds, and the oversupply would push down prices.

But some economists suspect something deeper at work. Kimelman and others cite the drawn-out economic recovery that began as early as mid-1991 but has sputtered several times since.

The Federal Reserve has repeatedly lowered interest rates in the past few years in an attempt to stimulate more lending and borrowing, and thus reinvigorate the economy.

But those efforts were largely deemed unsuccessful, as consumers and businesses instead used the lower rates to refinance high-interest debt accumulated during the spendthrift 1980s.

That’s one important reason this recovery is so sluggish. Unlike other recoveries, where surging growth tended to drive up prices, growth this time is slow enough to keep the lid on inflation.

To be sure, the government reported Thursday that wholesale prices retreated 0.2% in November, pulled down by declines in the cost of food and energy. On Friday the government said inflation at the retail level rose only marginally the same month.

“The market doesn’t mind if news is positive, as long as it’s not inflationary. For the most part, since the mid-1970s, growth typically implied accelerating inflation. So far this time around it’s not, and the market appreciates that,” said Mike Casey, an international economist at Maria Fiorini Ramirez Inc., a global consulting firm based in New York.

While the current recovery began as long ago as mid-1991, the low-inflation environment makes it seem like it just got here.

“If you look back in history, the early stages of recovery don’t create dangerous levels of inflation and bond markets typically rally. The problem we face now is, when did the recovery start?” said Kimelman, noting that inflation generally perks up in a recovery’s later stages.

Perry Beaumont, vice president of risk management at Swiss Bank Corp., suggests the economy may be settling into a less hectic pace than the sharp rises and declines of previous business cycles.

“There is a lot of discussion among market participants that perhaps we are moving away from the characteristic of sharp recoveries and big slowdowns into more moderate business cycles as we become smarter about anticipating slowdowns and managing them,” Beaumont said.