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Bond prices rallied Friday, strengthening on a government report showing moderate economic growth with low inflation.

The price of the Treasury's main 301/4-year bond was up 5/8 point, or $6.25 per $1,000 in face value, late Friday, while its yield fell to 7.48 percent.On Thursday, the bond's yield closed at 7.53 percent. Prices and yields move in opposite directions.

The government revised its estimate of growth in the gross domestic product from April to June to an annualized rate of 3.8 percent, up from an initial reading of 3.7 percent. However, economists had expected a higher revision to more than 4 percent so the report cooled concerns about rapid growth that would spur inflation.

An inflation gauge tied to the GDP report showed prices rising at an annual rate of just 2.9 percent in the second quarter, down from a first quarter increase of 3.1 percent.

Inflation hurts the value of Treasury securities because those securities pay a fixed rate of interest over their entire term.

The GDP report sent financial markets rising in tandem - the dollar, bonds and stocks all gained, each feeding off the strength of the others.

Raymond Worseck, chief economist with A.G. Edwards & Sons Inc. in St. Louis, pointed out that the GDP report represents economic activity that's two months old. Therefore, he said, it usually isn't a good way to accurately predict the future, as investors try to do.

However, on a Friday afternoon in August when volume is light a few traders can make a difference, he said.

"It's old news, but on a thin day you can run with old news and the market obviously did. The firmness in the dollar also helped," he said.

Robert Giordano, manager of Treasury securities for Bank Leumi Trust Co. of New York, said technical factors added to the rise.

"Some of it was real buying, but some was short-covering prior to the weekend," he said.

Traders known as short sellers anticipate a decline in prices, so borrow securities and sell them immediately, hoping to buy them back at a lower price, repay the loan and pocket the difference.

When prices go up instead, these short sellers often buy quickly to minimize their losses, a process that can itself prompt a rise in prices known as a "short covering rally."

At its peak Friday, the long bond was up about one point, but prices fell back in the afternoon as some traders took profits.

Short-term Treasuries rose 1-16 to 3-32 point and intermediate maturities rose 7-32 point to 11-32 point, said the financial information service Telerate Inc.

The Lehman Brothers Daily Treasury Bond Index, reflecting price movements on bonds with maturities of a year or longer, rose 2.55 to 1,214.70.

Yields on three-month Treasury bills rose to 4.66 percent as the discount went up 0.02 percentage point to 4.55 percent. Six-month yields fell to 5.04 percent as the discount rate fell 0.01 point to 4.86 percent. One-year yields dropped to 5.55 percent as the discount fell 0.01 point to 5.27 percent.

Yields are the interest bonds pay by maturity, while the discount is the interest at which they are sold.

The federal funds rate, the interest on overnight loans between banks, was 4 11/16 percent, down 5/8 point from late Thursday.

In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds closed at 91 7-16, up 5-32 from Thursday. The average yield to maturity was 6.38 percent, down from 6.40 percent.