Interest rates fell on Monday, as a weak report on home sales caused government bond prices to rally.

At 4 p.m., the price of the 30-year Treasury bond was up more than 1/4, lowering the yield to 6.11% from 6.12%.

The Treasury's 10-year note was the flavor of the day, rising about 1/2 in price. The yield fell to 5.44% from 5.48% on Friday.

Five-year notes rose 1/4, Cutting the yield to 4.79% from 4.83%. Two-year notes were up about 1/8, reducing the yield to 3.84% from 3.87%.

T-Bill Yields Down

On the short end, the Treasury auctioned a total of $24 billion in three-month and six-month bills at respective average discount rates of 3.02% and 3.11%, down from 3.07% and 3.12% at last week's auction.

The bond market, which has been rallying for the past several weeks on prospects for weak economic growth, benefited from a Commerce Department report showing that sales of new homes plunged last month.

The 5% decline to an annual rate of 629,000 sales was the biggest drop since March.

In addition, the June gain, originally reported as an 11% increase, was reduced to a 3.3% rise.

Trade Deficit Worse

Adding to the bad economic news, the Commerce Department also reported that the U.S. merchandise trade deficit widened to $34.39 billion in the second quarter, the biggest trade gap in five years.

Market analysts expect the Commerce Department today to announce a reduction in the rate of growth in gross domestic product in the second quarter, originally reported at 1.6%.

Economists at Chemical Securities Inc., noting that the June trade deficit was badly underestimated, are looking for a downward revision to 1.2%.

Strength in the bond market fed stocks. The Dow Jones industrial average gained 3.36 points to 3,643.99. The Standard & Poor's 500 rose 1.36 to 461.90. And the Nasdaq composite index surged 3.31 to 737.38.

The dollar finished at 1.6715 German marks, up from 1.6635, and at 103.75 yen, unchanged.

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