NEW YORK — Bond prices slumped in thin trading Tuesday amid renewed inflation fears and some dissatisfaction overseas with the latest U.S. budget-cutting agreement.
The Treasury's closely watched 30-year bond, which by midday had been up 13/32 point, or about $4 per $1,000 in face amount, ended the session about $10 lower. Its yield, which moves inversely to its price, rose to 8.99% from 8.88%.
The credit markets had rallied in early trading following interest rate cuts by central banks in West Germany, France and the Netherlands, which were seen as an orchestrated effort to stimulate the world economy and bolster the weakened dollar.
However, analysts said bond prices changed course as commodity prices began to move higher, sparking fears of higher inflation, and after a West German Bundesbank official reportedly criticized the deficit-reduction accord reached late last week in Washington.
Hans Wertz, a member of the Bundesbank's policy-making committee, told a West German news agency that plans to reduce the U.S. federal budget deficit by $30 billion in fiscal 1988 were inadequate. To fulfill the pledge the United States made earlier this year to help stabilize currency rates, the 1988 deficit should be cut by at least $70 billion, he said.
Although most analysts called that figure unrealistic, Wertz's statements helped push down the dollar, and the credit markets followed suit.
Bond traders worry that a weak dollar will lead to higher inflation by making imports more expensive and making dollar-denominated bonds and notes less attractive to foreign investors.
In the secondary market for Treasury bonds, prices of short-term governments fell 5/32 point, intermediate maturities were off between point and 11/16 point and 20-year issues fell about a point, according to the investment firm of Salomon Bros.
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 Merrill Lynch daily Treasury index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, stood at 110.71, down 0.14. The Shearson Lehman daily Treasury bond index, which makes a similar measurement, fell 6.0 to 1,152.72.
In corporate trading, industrials fell 3/4 point and utilities fell 1/2 point in moderate trading.
Yields on three-month Treasury bills were up 7 basis points to 5.76%. Six-month bills fell 3 basis points to 6.07% and one-year bills gained 4 basis points at 6.52%. A basis point is one-hundredth of a percentage point.
The federal funds rate, the interest on overnight loans between banks, traded at 6.75%, up from 6.813% late Monday.
Also Tuesday, yields on five-year Treasury notes fell in an auction to the lowest level since March. The average yield was 8.30%, down from 8.48% at the last auction on Sept. 3.