Stocks Fall; Interest Rates Blamed : Dow Drops 25.78 to 1,990.22, Lowest Level Since May 27

Interest rate worries drove the stock market broadly lower on Monday, pushing the closing Dow Jones industrial index below 2,000 for the first time in nearly three months.

“This is very nervous trading,” said Jack Baker, head of block trading at Shearson Lehman Hutton Inc. “This isn’t the kind of market that’s going to bring people off the sidelines.”

The Dow index, which lost 21.52 points last week, gave up another 25.78 to close at 1,990.22.

That was the lowest closing level for the market’s best-known indicator since it finished at 1,956.44 on May 27, the day before the three-day Memorial Day holiday. When traders returned May 31, the Dow climbed 74.68 points and it has finished above 2,000 every day since then.

Declining issues outpaced gainers by a margin of nearly 3 to 1 among issues listed on the New York Stock Exchange, with 385 up, 1,107 down and 466 unchanged. The NYSE composite index fell 1.60 to 145.94.

The pace of trading was sluggish, however. Volume on the floor of the NYSE amounted to 122.25 million shares, down from 122.37 million shares on Friday.

As the market opened, stock prices pushed marginally higher, but quickly reversed course when a decline in bond prices drove fixed-income yields higher.

Analysts said the yields available in the bond and money markets are keeping many investors out of the stock market. That inclination was even more pronounced on the eve of the first of a flurry of economic reports due to be released this week, analysts said.

The government plans to report today on consumer prices for July. Later in the week, it plans to revise its estimate of second-quarter economic growth, among other things.

The economy has been growing at such a strong pace that the Federal Reserve boosted its rate on loans to member banks by a half percentage point to 6.5% earlier this month in a bid to head off inflation.

Shearson’s Baker said traders were worried that today’s consumer price report would show a big jump that would encourage the central bank to push interest rates even higher. That would make Treasury issues even more attractive to big institutional investors, compared to the uncertain returns on stocks.

On Monday, prices of the widely followed 30-year Treasury bond fell $5 for every $1,000 in face value, pushing its yield to 9.45% from 9.39% on Friday.

“As long as stocks are going down, these (bond prices) will provide some very stiff competition for the investors dollar,” said Alfred E. Goldman, director of technical market analysis for the brokerage A. G. Edwards & Sons Inc. in St. Louis.

In Tokyo, prices fell on the Tokyo Stock Exchange as some investors feared higher interest rates worldwide, traders said.

The Nikkei Stock index of 225 selected issues, which gained 80.06 on Friday, lost 130.24 to close at 28,079.18.

Stock prices closed lower in London in the slowest trading day of the year, with investors concerned that British interest rates may be raised again.

The Financial Times-Stock Exchange 100-share index closed down 12 at 1,832.3. Volume was a scant 231.5 million shares, the lowest recorded in 1988, and well down from 342.4 million shares on Friday.

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