Inflation fears sent bond prices tumbling Friday in a long-awaited drop following a rally that pushed yields to 20-year lows.
The government's main 30-year bond tumbled 1 9-32 point, or nearly $13 per $1,000 in face amount, after the Labor Department reported a bigger-than-expected rise in prices paid by wholesalers.The yield on the 30-year bond rose to 6.86 percent from 6.76 percent late Thursday. Bond prices and yields move in opposite directions.
Analysts said the inflation news was used an excuse to sell bonds after a rally dating to the beginning of the year pushed the yield on 30-year bonds below 6.70 percent.
They said the surge, fueled by optimism that President Clinton would cut the deficit, had to end sometime.
"The market sold off hard today, which was somewhat related to the disappointing (inflation) number," said Jack McIntyre, a fixed-income analyst with Technical Data in Boston. "But it was clearly the market moving in a corrective mode."
The 0.4 percent increase in the Producer Price Index in February was the biggest rise in more than two years.
Inflation erodes the value of securities that pay a fixed return, such as bonds. The stock market also sank on the inflation report.
The news was viewed as a signal that inflation may recur during the economic recovery.
In January, the price index increased 0.2 percent. For the first two months of the year, producer price inflation was running at a 3.4 percent annual rate, more than double the 1.6 percent price rise registered for all of last year.
February's increase was the largest since an identical rise in November 1990, early in the recession. Since then, the slow economy has dampened demand, keeping a lid on prices.
In the secondary market for Treasury securities, short-term maturities fell 4-32 point to 14-32 point and intermediate maturities declined 22-32 point to 28-32 point, the Telerate Inc. financial information service reported.
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 Lehman Brothers Daily Treasury Bond Index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, fell 7.22 to 1,289.30.
Yields on three-month Treasury bills were unchanged at 3.01 percent as the discount held at 2.96 percent. Yields on six-month bills rose to 3.16 percent as the discount rose 2 basis points to 3.08 percent. Yields on one-year bills rose to 3.37 percent as the discount gained 3 basis points to 3.25 percent.
A basis point is one-hundredth of a percentage point.