Price Report Sparks Bond Market Rally : Markets: Interest rates pull back broadly and the Dow climbs 13.29 points in relief. OPEC dispute hurts oil shares.

News that inflation was virtually nonexistent last month sent Treasury bond yields plunging Friday and helped lift stock prices across a fairly broad front.

“There was a real buying panic” in bonds, said John V. Sebastian, an executive vice president at investment firm Clayton Brown & Associates in Chicago. “This was very, very good news on the inflation front.”

The yield on the Treasury’s key 30-year bond fell to 6.81% at the close from Thursday’s 6.87%. It was the bond’s lowest yield in a month.

Short-term yields also tumbled. The discount rate on the one-year Treasury bill sank to 3.36% from 3.45% on Thursday.

Short-term rates in particular had moved up significantly in recent weeks on worries that inflation was resurging. Investors feared that a large inflation number for May would force the Federal Reserve to tighten credit for the first time in years in an effort to dampen the economy and thus hold back price increases.

But the Labor Department’s calculation of its producer price index, which measures inflation at the wholesale level, showed no change in May. That followed worrisome increases of 0.4% in March and 0.6% in April.

Analysts said the May report helped bonds on two fronts:

* It lowered the chances of a Fed tightening and thus took pressure off short-term rates.

* It removed some of the fear investors have had about buying longer-term bonds. Because inflation erodes the value of fixed-rate investments such as bonds, Wall Street becomes unwilling to accept relatively low yields if it appears that inflation is on the rise.

Icing the cake was a second government report showing that retail sales rose by an anemic 0.1% in May, far less than expected. That seemed to give the Fed even less room to raise interest rates, since rising rates can stifle economic growth.

Also, oil prices dropped sharply on news that Kuwait had rejected third-quarter production quotas set by OPEC. That raised the possibility of an oil glut, which also would be deflationary.

In futures trading on the New York Merc, light, sweet crude oil for July sank 30 cents to $18.98 a barrel. Prices fell to as low as $18.83 a barrel in the morning, touching a recent low on Jan. 22. Prices recovered somewhat after Kuwait said it will cut production if oil prices continue to slide.

Even with the bond market’s wealth of good news, however, analysts noted that the market will face another test Tuesday, when the government reports on consumer price inflation for May. That measure reflects pricing in the service sector of the economy, a volatile area not covered by the wholesale inflation index.

Stocks

The stock market, which had been on edge all week in anticipation of the inflation figure, breathed a sigh of relief as the producer price report was released.

The Dow Jones industrial average rose 13.29 points to 3,505.01, trimming its loss for the week to 40.13 points.

Smaller stocks registered bigger gains as the NASDAQ composite index jumped 5.14 points to 693.19. Winners outnumbered losers on both NASDAQ and the New York Stock Exchange, and Big Board volume rose to a fairly active 256.8 million shares.

Still, Jeff Landle, portfolio manager at Twenty-First Securities Corp., said the market behaved cautiously. He said investors remained reluctant to let down their guard and buy with abandon.

Among the market highlights:

* Bank stocks were some of the biggest beneficiaries of the interest rate slide. Citicorp rose 3/8 to 27 1/2, Chemical Banking climbed 1 1/8 to 38 1/2, BankAmerica rose 1 1/2 to 43 7/8, Wells Fargo surged 4 to 103 and Signet Banking rose 1 7/8 to 53 1/8.

* Transportation stocks rallied as oil prices retreated. AMR, parent of American Airlines, jumped 2 3/8 to 69 3/8, Delta rose 1 7/8 to 52 7/8 and trucker Roadway added 1 to 53 1/4.

* On the downside, energy stocks stumbled as oil prices plunged.

Occidental Petroleum dropped 1 7/8 to 20, Atlantic Richfield lost 4 1/8 to 117 1/4, Mobil fell 2 1/4 to 71 1/4, Exxon slid 1 3/4 to 65 1/4, Chevron sank 2 5/8 to 87 5/8 and Texaco tumbled 1 3/8 to 63 1/8.

Oilfield service stocks also slumped in sympathy, with Schlumberger falling 2 5/8 to 64 3/4, Haliburton down 2 1/2 to 37 5/8 and Baker Hughes off 1 3/8 to 27 1/4.

* Restaurant chain Showbiz Pizza lost 10 1/8 to 18 3/4. The company said it lowered its second-quarter earnings expectations because of falling sales at its Chuck E. Cheese restaurants.

Overseas, share prices ended at their intra-day highs in Frankfurt. The 30-share DAX average closed up 7.91 at 1,680.98. In London, the FTSE-100 average ended 1.8 points higher at 2,861.8.

Tokyo’s 225-share Nikkei average finished 7.63 points higher at 20,500.95.

Other Markets

In commodities trading, gold fell as the inflation news dulled the metal’s luster as a safe haven. On the Commodity Exchange in New York, gold for current delivery fell $3.50 an ounce to $366.10 an ounce. Silver also plunged 11.6 cents an ounce to $4.185 an ounce.

In foreign exchange trading, the dollar held its ground against key foreign currencies, although the inflation report hurt any immediate chance of U.S. interest rates rising.

The two reports sent the dollar tumbling about 1 1/2 pfennigs on the German mark in early New York trading. The dollar recovered most of its losses and settled at 1.626 marks, slightly lower than late Thursday’s 1.630 marks.

In New York, the dollar closed at 106.15 Japanese yen, barely changed from 106.16 yen late Thursday.

Market Roundup, D4

Selected Interest Rates Corporate AAA bonds: 7.40% 90-day CDs: 3.26% 3-month Treasury bills: 3.11% Municipal bonds: 5.67% Bank prime rate: 6.00% Federal funds rate 2.96% Discount rate: 3.00% Source: Federal Reserve Board