The bond market is getting a powerful lift from signs that the pace of economic growth is slowing, but some analysts worry that a decline in the dollar could spoil the party. The government's report on Friday that the nation's civilian unemployment rate jumped to 5.6 percent in August from 5.4 percent in July was the catalyst for one of the bond market's most forceful rallies of the year. What heartened the market was not so much the widely-anticipated increase in the unemployment rate but the accompanying statistics that indicated a slowdown in new job creation and little if any increase in wages. Trading volume in the bond market had slowed to trickle in advance of the report as some bond dealers suspected it would confirm their worst fears _ that the economy was growing so rapidly that it would ignite inflation and force the Federal Reserve to restrain it. But the report had only pleasant surprises for many bond analysts. By midafternoon Friday, prices of some 30-year Treasury bonds were up about $25 for every $1,000 in face value. That gain was the biggest since a $26 per $1,000 in face value rise on Jan. 15, the market's best day of 1988. The price rise trimmed yields on the 30-year issue, often viewed as an indication of broader interest rate trends. At midafternoon, the 30-year bond yielded 9.05 percent, down from 9.30 percent late Thursday and from 9.43 percent at the end of trading in the previous week. Some analysts said the unemployment report may mark a turning point from which interest rates will trend lower through the end of the year. Elliott Platt, director of fixed-income research for Donaldson Lufkin & Jenrette Securities Corp., said, ``There is a very good chance that rates have peaked.'' Platt said the trade deficit contraction and business spending on equipment are slowing. He noted that earlier this past week the government reported a 0.8 percent decline in its leading indicators index for July and a 3.5 percent drop in manufacturing orders to factories. He said the unemployment report ``suggests that the slowdown may be here.'' He expects long-term yields will sink to 8.5 percent by yearend. But many economists say it is too early to call a turning point in rate trends and expect rates will head higher. Harold Nathan, senior financial economist at Wells Fargo & Co. in San Francisco, said he expects long-term yields could reach 10 percent by the end of the year and 10.5 percent next year. Nathan said the unemployment report ``showed some weakness in the labor markets that we have not seen in some time,'' but added it does not reflect a sharp economic slowdown. ``We are growing at a more sustainable but strong pace of activity. The bottom line is that there is still enough strength to put inflationary pressures on the economy,'' he said. Sung Won Sohn, chief economist for Norwest Corp. in Minneapolis, said the unemployment report takes pressure off the Fed to push up short-term rates. But he said the economy ``is still doing fairly well'' and as a result feels ``this is a temporary pause, not a peak, in interest rates.'' Sohn said foreign central banks have raised their interest rates by much more than the U.S. central bank has this year, and that the dollar will probably come under pressure because of that. A declining dollar could reduce foreign demand for securities denominated in dollars such as Treasury notes and bonds. That could result in increasing pressure to raise rates to find buyers for the issues. Sohn expects 30-year bond yields of 10 percent by the end of the year. William V. Sullivan Jr., director of money market research for Dean Witter Reynolds Inc., said he thinks it is too early to say if the unemployment report marks a turning point for the credit markets. ``If the dollar plunges in reaction to signs of an economic slowdown it is possible that the bond market has to give up some of these gains,'' he said. In the meantime, he said he expects bond professionals are ``reconsidering their exposures'' just in case the slowdown turns out to be lasting.
