Long-term interest rates climbed back over 7% Friday on inflation and supply fears in the government bond market.

In late trading, the price of the 30-year Treasury bond fell about 3/8 point, boosting the yield to 7.03%, from 6.99%.

Bond market weakness hurt stocks, as well. The Dow Jones industrial average, which had surged to records on each of the previous two days, fell 30.45 points, to 3,492.93.

The dollar rose to 1.625 German marks, from 1.6172. but fell to 110.20 yen, from 110.65.

Worrisome Fed Report

The bond market's two-week-old inflation scare got new life late Thursday from the Federal Reserve's report that the M2 money supply grew a stronger than expected $20.1 billion in the week ended May 10.

The scare continued to gather force Friday from a spike in gold and other commodity prices. On the Commodity Exchange, the price of the current gold futures contract rose $3.20, to $377.90 an ounce.

Donald Fine, market analyst for the Chase Securities subsidiary of Chase Manhattan Corp., said it is too early to conclude that inflation is moving sharply higher.

He noted that M2 has shown negative growth for most of the year so that its recent strength is not a sure-fire sign of inflation.

"Sometimes, when it comes to money growth, bond market participants behave like Pavlov's dog," Mr. Fine said. |It's far too early to draw conclusion."

Mr. Fine noted that sustained money-supply growth would not occur unless there is a strong pickup in bank asset generation. "There are signs that bank lending is starting to pick up, but the signs are tenuous," he said.

He predicted that consumer prices would rise 3.5% this year, up from a 3% rate in 1992. "Inflation will be higher, but that doesn't mean high inflation," Mr. Fine said.

As long as the economy grows at the current 2.5% to 3% rate, the Federal Reserve has no reason to be concerned about inflation and probably would not tighten credit conditions.

He added that, if growth picks up sharply in the second half, chances are reasonably good that the Fed would raise short-term interest rates. The Fed has not tightened credit in four years.

A fresh supply of Treasury securities is also pressuring the bond market.

On top of the $24 billion in three- and six-month bill sales scheduled today, the government will sell $15.75 billion of two-year notes Tuesday, $11 billion of five-year notes Wednesday, and $14.75 billion of one-year bills Thursday.

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