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BOND PRICES SURGE AS DATA SHOW EXPANSION, NOT INFLATION

SHARE BOND PRICES SURGE AS DATA SHOW EXPANSION, NOT INFLATION

Bond prices finished sharply higher Friday, surging after they passed a technical barrier as new data showed the economy continues to grow but not at an inflationary rate.

The volume of trades accelerated late in the day as a group of traders known as short-sellers, who gamble on a fall in prices, jumped in to change their holdings when the technical barrier was passed.Demand was particularly strong for long-term bonds, which are more subject to move on inflation news than shorter-term maturities. Inflation erodes the value of fixed-income investments like bonds.

The price of the Treasury's main 30-year bond closed up 1 9/32 points, or $12.81 per $1,000 in face value, extending a rally from Thursday when the price rose 11/4 points because of an unexpected drop in domestic durable goods orders.

The bond's yield, which moves in the opposite direction of price, fell to 6.70 percent, a level unseen since mid-July. On Thursday, the bond's yield closed at 6.81.

The two-day rally seemed an improbable end to a week in which there was little new economic data and traders early on were worried about the market's ability to absorb new supply from 2-year and 5-year bonds.

Demand was steady from the outset Friday, despite a report from the National Association of Realtors that sales of previously owned homes rose 5 percent in July to the highest level in more than a year. It was the third straight monthly advance.

"The market took off and really never looked back," said Jim Kenney, head trader at Prudential Securities Inc. "Existing home sales didn't bother them."

Later in the morning, the Philadelphia Federal Reserve Bank said its survey of economic forecasters found they were more optimistic that inflation would remain benign for the next 15 months. The survey also showed forecasters did not expect an economic slowdown soon.

The resulting lift was enough to push bond prices above a 30-day moving average, a benchmark watched by technical traders, and many began to shuffle their holdings as a result.

Eric Hamilton, analyst at Thompson's Technical Data, said the demand may represent a broader change to a more bullish sentiment in the market. But several economic reports due next week, including leading economic indicators, the purchasing managers' index and the August employment report, are likely to have a more defining effect.

Short-term Treasuries rose 1/4 point to 5-16 point and intermediate maturities rose 9-16 point to 13-16 point, the financial information service Dow Jones Telerate Inc. reported.

The Lehman Brothers Daily Treasury Bond Index, reflecting price movements on bonds with maturities of a year or longer, rose 6.05 to 1,251.12.

Yields on three-month Treasury bills were unchanged at 5.49 percent as the discount held at 5.34 percent. Six-month yields went up to 5.58 percent as the discount rose 0.01 point to 5.35 percent. One-year yields dropped to 5.67 percent as the discount fell 0.06 point to 5.36 percent.

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