CREDIT : Bonds Reel in Wake of Report on Trade Deficit

Bond prices tumbled Wednesday, pressured by a falling dollar in the wake of the government’s report that the September merchandise trade deficit narrowed.

The price of the Treasury’s bellwether 30-year bond fell 31/32 point, or about $9.70 for each $1,000 face amount.

Its yield rose to 9.11%, up from 9.01% late Tuesday and its highest level since Sept. 27 when it yielded 9.13%.

Although the trade gap narrowed, analysts said it raised the possibility that the dollar would need to fall further to make American goods more competitive on world markets.

The Commerce Department said the September merchandise trade deficit fell $2 billion from the previous month to $10.5 billion. Exports set a record, while imports dropped slightly from their record levels of August.

Bond traders worry that a weak dollar invites inflation by making U.S. exports cheaper and therefore more attractive to foreign consumers.

“If you get a big gain in exports it revives fears that the manufacturing sector will try to meet export demand,” said Peter Greenbaum, an analyst with Smith Barney, Harris Upham & Co. “Over time this tends to introduce increased inflationary pressures into the system.”

Inflation Erodes Value

Adding to the inflationary fears was a second government report showing that the U.S. industrial operating rate in October rose 0.2 percentage points to 84.0%, its highest level in more than eight years.

Analysts said both reports suggested that the economy is not cooling off as many economists had forecast.

The bond market hates inflation because it erodes the value of fixed-income securities such as Treasury notes and bonds.

In the secondary market for Treasury bonds, prices of short-term governments fell between 1/8 point and 5/32 point, intermediate maturities fell by between 7/32 point and 19/32 point and long-term issues were down from 27/32 point to 29/32 point, according to Telerate Inc., the financial information service.

The movement of a point is equivalent to a change of $10 in the price of a bond with a $1,000 face value.

The Shearson Lehman daily Treasury bond index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, fell 4.43 to 1,137.72.

Corporate bonds also declined. Moody’s investment grade corporate bond index, which measures price movements on 80 corporate bonds with maturities of five years or longer, dropped 0.97 to 294.24.

Yields on three-month Treasury bills fell to 8.16% as the discount fell 4 basis points to 7.90%. Yields on six-month bills rose to 8.39% as the discount rose 1 basis point to 7.95%. Yields on one-year bills rose to 8.56% as the discount rose 4 basis points to 7.93%.

A basis point is one-hundredth of a percentage point. The yield is the annualized return on an investment in a Treasury bill. The discount is the percentage that bills are selling below the face value, which is paid at maturity.

The federal funds rate, the interest on overnight loans between banks, was quoted late Wednesday at 8%, down from 8.675% late Tuesday.

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