Interest rates plunged on Wednesday, as government bonds rallied on more good news on inflation.

The yield on 30-year Treasury bonds sank to a record low of 6.56%, from 6.61% on Tuesday.

Intermediate Treasuries also got support from buying by municipalities, which back future refundings with U.S. government issues - a practice known as defeasance.

The yield on 10-year Treasuries fell to 5.71% from 5.77%. Two-year notes yielded 3.97%, down from 3.99%.

Stocks rallied on the lower interest rates. The Dow Jones industrial average jumped 27.11, to 3,542.55. The Standard & Poor's 500 index gained 1.99, to 450.08. The Nasdaq composite index jumped 4.02, to a record 712.49.

The dollar fell, because low inflation in the United States makes a tightening by the Federal Reserve unlikely. Late Wednesday afternoon in New York, the dollar was at 1.7155 German marks and 107.05 Japanese yen, down from 1.7185 marks and 108.02 yen.

Consumer Prices Flat

The government reported that the consumer price index in June was unchanged for the second consecutive month. Economists estimated that the index rose 0.1% last month.

This followed Tuesday's report that wholesale prices fell 0.3% last month - the steepest drop in two years.

In addition, the government reported that retail sales rose 0.4% in June, below the 0.5% rise predicted by economists.

Matthew Alexy, market strategist at First Boston Corp., said the latest data confirm that the economy is growing slowly and that inflation is low - an ideal environment for bonds.

He predicted, though, that the yield on the long bond may start to hit technical resistance as it nears 6.50%.

Alan Levenson, money market economist at UBS Securities, thinks the economy is stronger than it seems and sees rates rising a half percentage point by yearend.

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