1/24/97 -- 7:10 PM


NEW YORK (AP) - Treasury bond prices fell Friday and yields rose to the highest level in more than three months as investors worried a barrage of economic reports next week will signal robust growth and rising pressure on inflation.

The market took on a pessimistic tone this week ahead of the government reports, which include fourth-quarter economic growth and a closely watched measure of changes in wages and benefits that could portend rising consumer prices.

Investors are concerned that signs of faster economic growth with higher inflation could tip the scales and prompt the Federal Reserve to raise interest rates, either at its next policy meeting Feb. 4-5 or by March.

Interest rate hikes are used by the Fed to cool off the economy and thereby reduce the risk of rekindling inflation. Rising inflation erodes the value of bonds and other fixed-rate securities.

Underscoring concerns about a possible hike in interest rates was a warning Tuesday from Fed Chairman Alan Greenspan that the good news on inflation may be ending as low unemployment leads to rising wage demands.

The price of the benchmark 30-year Treasury bond fell 5/16 point Friday, or $3.13 for every $1,000 invested. Its yield, which moves in the opposite direction, rose to 6.88 percent from 6.86 percent late Thursday. The yield last reached that level on Oct. 10.

Prices of short-term Treasuries were unchanged, while intermediate securities ranged from 3/32 point to 7/32 point lower, reported Dow Jones Telerate Inc., a financial information service.

`I think what we see is a changing of moods to reflect rising concerns that the economy is going too fast with pressures from wages and that the Fed is going to have to do something soon about inflation,'' said Hugh A. Johnson, a senior vice president at First Albany Corp.

Market participants are especially focused on a Labor Department report Tuesday of fourth-quarter employment cost index for signs of growing wages, which can result in rising consumer prices. The report also will be closely watched by Greenspan.

``On the heels of his testimony regarding wages, everyone is now glued to any wage data coming out of Washington,'' said Sung Won Sohn, chief economist at Norwest Corp. ``We are bracing for a negative surprise on the wage and benefits cost.''

Economists expect the index to rise anywhere from 0.2 percent to about 1.2 percent, following a 0.6 percent increase in the third quarter.

``If it turns out to be 1.2 percent it would be a jolt to the bond market and Chairman Greenspan could not simply ignore that,'' Sohn said.

The market also faces lingering concerns about oversupply. The government auctioned $12.5 billion in five-year notes and $17.5 billion in two-year notes this week. The government and other corporate borrowers will be heavily in the market again in the next two weeks.

Bond prices initially got a boost early Friday from the rising dollar. But as the currency fell so did Treasuries.

The Lehman Brothers Daily Treasury Bond Index, reflecting price movements on bonds with maturities of a year or longer, fell 1.77 point to 1,234.55.

Yields on three-month Treasury bills were unchanged at 5.14 percent, as the discount remained steady at 5.02 percent. Six-month yields were unchanged at 5.32 percent, as the discount held at 5.12 percent. One-year yields rose to 5.58 percent, as the discount rose 0.01 percentage point to 5.30 percent.

The federal funds rate, the interest on overnight loans between banks, fell to 5.13 percent from Thursday's 5.25 percent.

In the tax-exempt market, the Bond Buyer index of 40 actively traded municipal bonds fell 15/32 point to 115 5/32. The average yield to maturity rose to 5.87 percent from 5.84 percent.

Copyright 1997 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.