May 30, 1986

Interest rates on short- and long-term Treasury securities rose sharply yesterday in response to signs that economic activity is strengthening and is likely to continue to improve. ''The market has been nervous about prospects for the economy,'' said one trader, who added that ''yesterday's data was enough to tip the scales'' toward lower prices and higher interest rates. He referred to a monthly report by purchasing managers that showed a strong increase in business conditions in May, as well as the Commerce Department's report of a larger-than-expected 1.5 percent increase in the index of leading economic indicators in April. Investors Wary Signs of a stronger economy have made traders and investors wary, because they expect that the improving business activity may put upward pressure on interest rates and dissuade the Federal Reserve from any additional moves to reduce short-term rates.

Britain, West Germany, Canada and other NATO allies expressed alarm today over President Reagan's decision to stop adhering to the terms of a 1979 strategic arms accord unless there is a major change in Soviet policy. According to participants in talks here among the foreign ministers of the North Atlantic Treaty Organization, Secretary of State George P. Shultz found himself isolated in defending the American decision. In announcing the decision Tuesday, Mr. Reagan said the United States would destroy two old submarines, which would keep it within the treaty limits for the next few months. But he said that when more cruise missiles are deployed on B-52 bombers later in the year, the United States would no longer destroy older missiles to stay within the limits.

The Government index designed to predict the course of the economy surged 1.5 percent in April, its third strong gain in as many months, the Commerce Department reported today. The rise, which was about twice what most analysts had expected, was widely regarded as confirmation that the business expansion would gain fresh momentum in coming months. ''I think it's heralding the second-half pickup that most everyone's been looking for,'' said Gordon B. Pye, chief economist for the Irving Trust Company. The index of leading indicators has now advanced in 10 of the last 12 months, with the April rise the biggest since October 1983. The department also made an upward revision in the March index, raising it to nine-tenths of 1 percent from the earlier figure of five-tenths of 1 percent.

The Koch administration has proposed an $82 million plan to provide separate housing for homeless people who are mentally ill, drug or alcohol abusers, elderly or young. The plan, a dramatic departure from previous policies, is designed to provide transitional and permanent housing for homeless people with different needs. In one facility, for example, 18- to 25-year-olds would receive job training and counseling to prepare them to live on their own, city officials said, while in another, mentally ill people would be offered psychological help. The proposal, which is to be outlined at a budget hearing at City Hall today, would be a first step toward reducing the need for large, barracks-style shelters that mingle homeless individuals with different problems in the same centers.

A Washington dispatch yesterday on sites for nuclear waste repositories misidentified Senator George J. Mitchell of Maine. He is a Democrat.