Bond Yields Leap on Fears of Inflation, Higher Interest : Markets: Some Southland lenders raise mortgage rates. Blue-chip prices tumble for the second consecutive day.

Fears that inflation and interest rates could rise again soon sent bond yields soaring Friday to the highest levels since last summer, triggering a modest selloff in stocks and prompting some Southern California lenders to raise their mortgage rates.

The sharp rise in bond yields--the second in two days--puts pressure on rates to rise throughout the economy, which could boost the cost of borrowing for businesses and consumers and dampen future economic growth.

The yield on the Treasury’s 30-year bond shot up to 6.63%, the highest since last July and up from 6.54% Thursday and 6.48% Wednesday.

The yield rise sent blue-chip stocks tumbling for the second session in a row, with the Dow Jones industrial average losing 35.18 points to close at 3,887.46. For the week, the index was off 7.32 points.

The rapid rise in interest rates had some veteran traders wondering if the bond market’s long rally is about to run out of gas. Bond prices fall when rates rise.

“It’s too early to pronounce this the beginning of the bear market,” said Russell Abbott, a bond trader at First Boston Corp. “But it is exhibiting many of the characteristics of bear trading.”

The sharp rise in bond yields was triggered by concerns that the Federal Reserve Board may soon raise short-term rates again to keep long-term inflation in check. Traders were also still reacting to a report issued Thursday showing that some manufacturers are beginning to pay higher prices for raw materials.

In addition, traders were gearing up for Fed Chairman Alan Greenspan’s testimony before Congress on Tuesday. (Financial markets will be closed Monday for the Presidents’ Day holiday.) A few days after Greenspan’s last congressional appearance, on Jan. 31, the Fed boosted the key federal funds rate by a quarter-point and touched off a 96-point drop in the Dow Jones industrials.

The 30-year bond has risen more than 0.3 percentage points since the Fed raised the federal funds rate. Rates on 30-year mortgages were at an average 6.97% just before the Fed moved. This week, they averaged 7.11%, the Federal Home Loan Mortgage Corp. reported.

A handful of Southern California lenders raised their rates on fixed 30-year mortgages by about one-eighth of a point on Thursday, and a few more followed suit on Friday. Rates now are generally between 7.125% and 7.375%, up from 7% about three weeks ago. The latest rate hike would add about $13 to the monthly payment on a $150,000 loan.

However, Joseph Conrad, a director of the Los Angeles County Assn. of Mortgage Brokers, said the rate hike probably had more to do with the arrival of a three-day weekend than with the selloff in the bond market. Most financial institutions will be closed Monday for the holiday.

“Some lenders raise their rates a little at the start of a three-day weekend, just to give themselves a little protection in case something happens before they reopen on Tuesday,” said Conrad, a broker and president of the Spectrum Group in Woodland Hills. “Rates might go back down a little next week.”

Still, most economists say mortgage rates will climb at least a quarter-point and perhaps more than half a point by the end of this year.

“We still believe the trend is for rates to rise, though slightly over the course of the year,” said Robert Van Order, the Federal Home Loan Mortgage Corp.’s chief economist.

As for stocks, their outlook will depend in part on how much further rates will rise, analysts said.

A.C. Moore, stock market analyst at SBCM/Argus, said interest rates would have to move a half to a full percentage point higher before having an impact on what he described as stocks’ primary positive trend.

“Interest rates can go up a good bit more before that becomes a problem,” he said.

In the broader market, declining issues beat advances 1,412 to 702 on New York Stock Exchange volume of more than 289 million shares. The Nasdaq Stock Market composite index slid 1.39 to 788.85 but gained 7.46 in the week.

Among the stock market highlights:

* Economically sensitive cyclical stocks, which have rallied recently on the view they will benefit most from the economy’s expansion, lost ground. Among cyclical stocks, Chrysler shed 3/4 to 57 7/8, Caterpillar dropped 5/8 to 108 1/8 and Whirlpool was off 7/8 to 68 5/8.

* Scripps-Howard shot up 7 to 82 after E.W. Scripps offered to buy the 14% of the company’s stock it did not already own. E.W. Scripps offered three of its class A common shares for each Scripps-Howard share. E.W. Scripps ended off 1/8 to 28 5/8.

* Shares in Mexican telecommunications company Telefonos de Mexico dropped 2 1/4 to 71 3/8, topping the NYSE’s most active list. Traders pinned the drop to investors’ concern about declines in world stock markets and profit taking.

Overseas, London’s Financial Times 100 index ended down 42.7 points at 3,382.6. Frankfurt’s DAX index closed at 2,151.97, up 1.09% or 23.25 points.

Tokyo’s Nikkei average finished 28.21 points, or 0.15%, higher at 18,959.60 but showed a loss of 1,031.1 points since last Friday.

In other markets:

* The dollar fell against most European currencies amid disappointment in its failure to sustain a rally earlier in the week on news of a German rate cut. The dollar was quoted at 1.7133 marks in late New York trading, down from 1.7265 Thursday.

The dollar managed to post a minor gain against the yen after Japanese officials said they plan steps to make markets more open to U.S. exports.

* Gold plunged, leading other metals lower. Traders said a plunge in bond prices, potential violence in South Africa, and faltering trade talks in Japan have all failed to spark new demand for gold. Gold bullion fell $2.70 on New York’s Commodity Exchange, where the most-active April contract settled at $381.60 an ounce.

* Energy futures prices were mostly higher Friday in very light trading ahead of the three-day weekend. Light sweet crude oil for delivery in March settled at $14.21 per barrel, down 2 cents, on the New York Mercantile Exchange.