Yields Up on Fears of Inflation : Markets: Long-term bond rates jump to 6.94%. The surge helped send Dow down 21.34.

Bond yields jumped Friday, clipping the stock market, as new jitters over inflation swept markets.

The yield on the Treasury’s 30-year bond, a bellwether for other long-term interest rates, shot up to close at 6.94%, versus 6.86% on Thursday and 6.81% a week ago.

Friday’s yield was the highest since Feb. 23, when long-term interest rates were in the midst of a broad decline on optimism about President Clinton’s proposal to cut the federal budget deficit.

On Wall Street, the surge in rates helped send the Dow Jones industrials down 21.34 points to 3,439.98. The Dow lost 31.60 points for the week.

Analysts said bond traders seemed excessively spooked Friday by long-dormant inflation concerns, and by the possibility of the Federal Reserve raising short-term interest rates sooner than later to keep the economy from expanding too quickly.

“The central theme of the day’s trading was inflation concerns and the Fed’s possible response to them,” said Dan Seto, economist at Nikko Securities.

Two reports helped stoke bond owners’ inflation worries:

* In its revised fourth-quarter gross domestic product report, the government said its fixed-weight deflator, a key inflation measure, rose at a 3.4% annualized rate in the quarter instead of the previously reported 2.9%.

Because many commodity prices have risen at a brisk pace so far this year, bond traders viewed the deflator revision with particular apprehension: Taken together, the fourth-quarter inflation data and the commodity rise this quarter suggest an unexpectedly strong upward trend in inflation, which could eat away at fixed-rate returns on bonds.

* In Memphis, Tenn., Federal Reserve Gov. John LaWare told a business group that recent commodity price increases were “disturbing,” though he added they are “perhaps temporary.”

LaWare also said the economy’s recovery is genuine. “It’s not a false alarm, and we’re not looking at a potential double-dip” recession, he said.

His comments were interpreted by some bond traders as a sign that the Fed believes that it needn’t cut interest rates further to help the economy. What’s more, if the economy does indeed remain on a roll, the Fed could before long be forced to raise short-term interest rates from their current 30-year lows to keep growth at a moderate pace.

Analysts believe that the Fed’s policy-making Open Market Committee, which met last Tuesday, voted to wait for further information before deciding that recent inflationary signs require a boost in short-term rates.

On Friday, short-term rates inched higher in credit markets, though the increase was small compared to the rise in inflation-sensitive long-term yields. The yield on one-year Treasury bills closed at 3.32%, up from 3.28% on Thursday.

Many bond experts have been warning for weeks that long-term yields had fallen too quickly this year. The 30-year T-bond yield hit 6.72% on March 8, down from 7.39% at year’s end and its lowest level since the Treasury began regularly auctioning 30-year bonds in 1977.

Bearish bond traders have argued that euphoria about Clinton’s deficit-reduction plan would evaporate before long, and that the market would then face the reality of a still-strong economic recovery--and the potential for an annualized inflation rate above the 3% that Wall Street has almost universally anticipated for 1993.

Next week, the bond market will have to weather a number of important economic reports, including March employment statistics. New signs of a strengthening economy could rekindle inflation worries and accelerate the profit taking in bonds, sending yields higher, experts warn.

Stocks

Blue chip stocks sank as bond yields rose. But the market overall weathered the bond market’s troubles with relative calm.

While the Dow industrials lost 21.34 points, the NASDAQ composite index gained 0.53 point to 681.54.

In the broad market, declining issues outnumbered advancing ones by about 6 to 5 on New York Stock Exchange. Volume eased to 226.65 million shares from 251.53 million on Thursday.

Among the market highlights:

* Drug stocks suffered more selling. Merck fell 1 1/2 to 34, Johnson & Johnson lost 1 1/2 to 39 1/2, Pfizer lost 1 1/4 to 58 3/8, and Lilly fell 1/2 to 45 3/8.

* Northern Telecom tumbled 4 3/4 to 37 7/8. Late Thursday, the company said its first-quarter earnings would be below analysts’ expectations and lower than levels posted a year ago.

* IBM rose 7/8 to 51 3/8 in heavy trading after the computer company appointed Louis V. Gerstner Jr., the chairman of RJR Nabisco, as its new chairman and chief executive. The news was expected.

* Sears added 1 1/4 to 54 1/8 amid investors’ hopes that its proposed initial public offering of its Allstate insurance unit will boost the value of Sears stock.

Meanwhile, Sears’ Dean Witter Discover unit surged 2 1/4 to 36 5/8 after brokerage S.G. Warburg initiated coverage of the stock with a buy rating.

* Firstfed Financial, a Southland S&L;, slid 2 1/8 to 23. It said loan losses in the first quarter will be more than twice the rate it had expected. The firm blamed the continuing California recession.

Overseas, London’s FTSE-100 index was up 0.1 point to 2,852.9. Frankfurt’s DAX index ended 4.14 points higher at 1,661.29.

In Tokyo, the Nikkei average added 23.78 points to 18,788.70.

Other Markets

The dollar ended a volatile week on a quiet note by falling broadly in light trading, heavily influenced by technical and speculative pressures.

After seeming to break out of a trading range on Thursday, the dollar fell back to its previous levels against the German mark. In late trading in New York, the dollar closed at 1.634 German marks, down from 1.642.

The Japanese yen, meanwhile, gained for a second day against the dollar, bouncing back from its plunge on Wednesday. The dollar closed at 116.50 yen, down from 117.30 late Thursday.

Meanwhile, on the New York Mercantile Exchange, light, sweet crude oil for May delivery ended unchanged at $20.41 a barrel.

On the Commodity Exchange in New York, gold for current delivery closed at $332.40 an ounce, off 30 cents, and March silver rose 1.3 cents to $3.719 an ounce.