NEW YORK — Bond prices surged in one of their biggest gains of the year Tuesday, pushing long-term yields to two-month lows as the government reported an unexpected narrowing of the April trade deficit.
Prices of the Treasury's widely followed 30-year issue climbed more than 2 points, or $20 for every $1,000 in face value. That was the biggest one-day rise since 30-year prices climbed $26 on Jan. 15.
Yields on the long bonds, often seen as an indication of broader rate trends, fell to 8.81% from 9.01% late Monday. That was the lowest since long-term rates finished at 8.73% on April 13.
Rates also fell on short-term Treasury securities. Prices of municipal and corporate bonds rose.
The rally was triggered by the Commerce Department's report that the nation's trade deficit shrank in April to a seasonally adjusted $9.89 billion from $11.7 billion in March and the lowest level since December, 1984.
"The trade figure was much more favorable than almost anyone had anticipated," said Steven A. Wood, director of money market research for BankAmerica Capital Markets Group in San Francisco.
He said the improvement, which reflected declines in both imports and exports, indicated to some investors that interest rates have room to fall and that chances are waning for an acceleration of inflation.
The report contributed to a rise in the dollar on foreign exchange markets, a development that could prove encouraging to foreign investors who have seen an erosion in the value of their dollar-denominated investments because of the dollar's decline over the past three years.
Wood said the report prompted some buying by individual investors who have generally stayed out of the market this year. He said some of these investors felt that rates may have peaked when they reached 9.35% in late May.
But Wood said the market's reaction to the report may prove excessive.
He said that while exports fell, they remain at relatively strong levels while factories are operating at or near capacity. At the same time, he said, domestic demand remains strong.
"The market may have discounted the inflation threat too much," he said.
Leonard Santow, a managing director at the investment consulting firm Griggs & Santow Inc., said he thinks that rates will soon reverse course and climb above 9%.
"On the horizon, we still have the same problems that we had last night--concerns about the economy growing at a rate that will cause inflationary pressures," he said.
In the secondary market for Treasury bonds, prices of short-term government issues rose 5/16 point, intermediate maturities rose by between 5/8 point and 1 points and 20-year issues climbed 1 5/8 points, according to figures provided by Telerate Inc., a business 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 Merrill Lynch daily Treasury index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, rose 0.96 to 110.85.
The Shearson Lehman Hutton daily Treasury bond index, which makes a similar measurement, rose 9.64 to 1,159.85, its biggest one-day rise since it climbed 10.13 points on Jan. 27.
In the tax-exempt market, municipal bond prices rose 7/8 point, according to the bond buyer municipal bond index.
Yields on three-month Treasury bills fell 9 basis points to 6.35%. Six-month bills fell 11 basis points to 6.55% and one-year bills fell 11 basis points to 6.81%. A basis point is one-hundredth of a percentage point.
The federal funds rate, the interest on overnight loans between banks, was quoted late in the day at 7.313%, down from 7.50% on Monday.
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