Stocks Drop in Erratic Trading; Dow Off 5.08

Stock prices slumped near the close of an erratic session Wednesday as interest rates took a big jump in the credit markets. Bond prices also plunged, with some long-term issues losing nearly $20 for every $1,000 in face value. Buyers were apparently worried by a decline in the dollar.

The Dow Jones average of 30 industrials, up more than 5 points at noon, was off 5.08 at 1,281.03 by the close. The average climbed 8.61 points Tuesday. Volume on the New York Stock Exchange came to 107.96 million shares, down from 114.15 million Tuesday.

Analysts said there were several reasons for investors’ cautious mood. Stock prices rallied Tuesday as interest rates turned downward in the credit markets. But the advance faded toward the close. And in Wednesday’s activity, open-market interest rates headed higher again with a vengeance.

Wall Streeters were also keeping a close watch on the dollar in foreign exchange markets after its sudden drop Tuesday and early Wednesday.

Berg Enterprises climbed 2 3/8 to 22 3/4 and Financial Institution Services rose 1 to 8 bid in the over-the-counter market on word that American Can planned to acquire the two companies. American Can shares slipped to 51 1/2.

Minnesota Mining & Manufacturing, which said it expected a “small increase” in first-quarter earnings, dropped 1 1/2 to 82 3/8.

Other losers among the blue-chip and technology issues included International Business Machines, down 1 3/8 at 133 1/8; Digital Equipment, down 3 at 113 1/2, and Hewlett-Packard, off 1 1/8 at 36 5/8.

In the credit markets, yields on 30-year Treasury bonds approached 12%, a level not seen since mid-October. Yields on such issues reached 11.99% late Wednesday, up from 11.67% late Tuesday. In corporate trading, industrials and utilities fell 1 points in moderate trading.

Yields on three-month Treasury bills rose 14 basis points to 8.49%. Six-month bills were up 32 basis points at 8.80%, and one-year bills rose 27 basis points to 8.94%.

The closely watched federal funds rate--the charge on overnight loans between banks--traded at 9%, up from 7.5% late Tuesday.