Rapid Decline in Interest Rates Leveling Off

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Interest rates are still far lower than a month ago, but as the Treasury concluded three consecutive days of note and bond auctions totaling $27 billion Thursday, there were signs that the rapid decline in rates had leveled off.

As bond prices fell modestly Thursday, the Treasury sold $8.75 billion of new 8 3/4 percent bonds due in 2017 at an average yield of 8.51 percent. That yield was up from the low of about 8.34 percent on Tuesday but remains far below the 9.16 percent yield for 30-year Treasury issues as recently as Jan. 8.

After such a steep drop in rates, many analysts said additional declines might require fresh evidence of a weak economy, or an easing in monetary policy by the Federal Reserve. So far, the Fed has not eased policy, thereby preventing short-term interest rates from declining as much as long-term bond yields. Overnight interest rates, for example, have been little changed at around 6 3/4 percent.

The steep drop in bond yields, and hopes of further declines in coming months, are based largely on expectations that economic growth will weaken in coming months and inflation will remain low. The rapid accumulation of inventories in the fourth quarter led to expectations that businesses would cut production this quarter, assuming that consumer buying continues slack.

Analysts said that cutbacks in production, if severe enough, would encourage the Federal Reserve to push down short-term interest rates within a few months. Lower short-term rates would lead to additonal declines in bond yields.

Although bond prices have fallen about 1 1/4 points in the last two days, many analysts are still optimistic that the trend to higher prices and lower interest rates will soon resume.

``The forces are already in motion that should cause the Fed to ease and bring bond yields down to 7 1/2 percent by spring,'' said Roger A. Craig, a bond portfolio manager at the Banc One Asset Management Corp. in Columbus, Ohio.

``The decline in economic activity is going to be quite severe,'' he said, adding that the January employment data to be published today should show a rise in the unemployment rate, and a smaller gain in the number of workers on non-farm payrolls than in recent months.

Many economists have warned that even if the non-farm payrolls appear to rise by more than the 250,000 monthly average of 1987, the January gains are often exaggerated because of a faulty seasonal adjustment. In the last three years, for example, the gains in non-farm payrolls initially reported for January have been later revised downward by an average of about 221,000 workers.

Prices of outstanding Treasury bonds fell about a half point Thursday, a small decline relative to the gains of nearly 8 points since Jan. …