Bond prices rose sharply Friday, rallying after the successful completion of the Treasury Department's $30 billion quarterly refunding auction. The newly issued 30-year government bond surged 1 25-32 points, or $17.81 per $1,000 in face amount, from its level at Thursday's auction. Its yield tumbled to 8.33 percent from 8.50 percent. Bond prices and yields move in opposite directions. The jump in the price of the long bond, the most widely watched of government securities, was the largest since last Oct. 13, when it rose 2 9-16 points in response to a sharp sell-off in the stock market. Credit market strategists attributed Friday's large increase to two factors: relief over the completion of the Treasury's three-day auction this week and a government report indicating that wholesale inflation in January was low, excluding volatile food and energy prices. The government sold $10 billion each of three-year notes, 10-year notes and 30-year bonds on Tuesday, Wednesday and Thursday. The market had viewed the auctions with concern that low foreign buying would push yields up and prices down to stimulate interest. The United States has come to depend on foreign investors, particularly the Japanese, to help finance the federal deficit and pay interest on the total public debt. Instead, the auction was completed successfully, with adequate foreign interest propped up by strong domestic buying. Demand slackened only in the final leg, the 30-year bond. ``There's a lot of relief the refunding is over and the auctions by and large went well _ at least better than expected at the beginning of the week,'' said Steven A. Wood, money market economist with BankAmerica Capital Markets Group in San Francisco. In addition, the credit markets were pleased with an increase of just 0.1 percent in wholesale inflation for January excluding a spurt in food and energy prices due to severe cold around the country. Overall, the Producer Price Index for Janaury rose 1.8 percent, the sharpest rise since 1974. But the ``core rate'' excluding food energy is viewed as a better measure of underlying inflationary pressure. Economists said the low core rate was interpreted to indicate that the Federal Reserve Board would not likely raise interest rates to try to cool off the economy and curb increasing costs. High inflation tends to erode prices of fixed-income securities such as bonds. ``It's now viewed the Fed does not have to overreact to the energy and food situation and it can probably continue to hold policy pretty steady,'' Wood said. In the secondary market for Treasury securities, prices of short-term government issues rose &lsqb; point to 5-16 point, intermediate maturities gained 13-32 point to 27-32 point and long-term issues climbed 29-32 point to 1 point, according to figures provided by Telerate Inc., a financial 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 Shearson Lehman Hutton Daily Treasury Bond Index, which measures price movements on all outstanding Treasury issues with maturities of a year or longer, gained 6.52 to 1,166.99. Yields on three-month Treasury bills fell to 7.99 percent as the discount declined 6 basis points to 7.74 percent. Yields on six-month bills slipped to 8.07 percent as the discount lost 7 basis points to 7.66 percent. Yields on one-year bills declined to 8.01 percent as the discount declined 7 basis points to 7.49 percent. A basis point is one-hundredth of a percentage point. The yield is the annualized return on an investment in a Treasury bill. The discount is the percentage that bills are selling below the face value, which is paid at maturity. The federal funds rate, the interest rate banks charge each other on overnight loans, was quoted at 8\ percent, up from 8 3-16 percent late Thursday. In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds closed at 92\, up 9-16 point. The average yield to maturity fell to 7.38 percent from 7.43 percent late Thursday.
