Government bonds rallied late Wednesday, sending interest rates back below 7%.

The improved sentiment in the bond market spilled over into stocks, which had fallen in the morning. The Dow Jones industrial average surged 55.64 points, to a record 3,500.03.

In late trading, the price of the Treasury's 30-year bond was up about 5/8. This reduced its yield to 6.97%, from 7.01% Tuesday.

The yield had shot up to 7.05% in the morning on a continuing spike in gold prices.

Weakness on Trade News

Bonds opened weaker after the Commerce Department announced that the U.S. trade gap widened to $10.2 billion in March, from a revised $7.9 billion in February. This was the largest deficit in four years.

A statement by Commerce Secretary Ronald Brown that the United States favors aggressive foreign-exchange moves to reduce its trade imbalance with Japan added to the morning's negative sentiment.

His statement was interpreted to mean the government would keep the dollar's value low versus the yen to support exports. A weak dollar discourages foreign investments in U.S. securities. A spokesman for Mr. Brown later backed down from that statement, and sentiment in the bond and foreign exchange markets improved.

The dollar was stung by Mr. Brown's comments, though it recovered somewhat on the retraction. In late New York trading, the currency fell to 1.6232 German marks, from 1.6245, and 110.75 yen, from 111.45.

But softer commodity prices gave the main impetus to the afternoon rally, said John Canavan, market analyst at Stone & McCarthy Research Associates.

Gold Rush Moderates

The price of gold, which surged $8 Tuesday, fell $1.80, to $374.20 an ounce on the Commodities Exchange. The Commodity Research Bureau's index of 21 futures prices fell 1.02 point, to 209.58.

Market sources said speculation is rife that hedge funds managed by investor George Soros are selling gold and buying bonds. Mr. Soros, who does not comment on his trading activities, sparked the gold rush of the last few weeks by selling bonds and buying the metal.

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