Bond Yields Surge; Buyers See End to Interest Rate Cuts

Bond yields soared Wednesday on the spreading belief that the Federal Reserve is finished lowering interest rates to help end the recession.

The Treasury’s 30-year bond, a bellwether for long-term interest rates, shotup to a yield of 8.55% from 8.47% Tuesday. Wednesday’s yield was the highest since 8.59% on Nov. 13.

The bond market pessimism dragged stocks down too, while the positive economic outlook strengthened the dollar:

* The Dow Jones industrial average fell 23.92 points, or 0.8%, to 2,961.99. The Dow struggled back from a midday drop of about 50 points.

* The dollar jumped to its highest level against the German mark in nearly 18 months. It reached 1.795 marks in New York before profit taking pulled it back to 1.791, up from 1.775 Tuesday. At the start of the year the dollar was at just 1.50 marks.

The bond selloff was sparked by comments by Federal Reserve Govs. Edward Kelley and John LaWare that the economy appears to be bottoming out and that a rebound could follow.

LaWare also said that further interest rate cuts aren’t necessary to stimulate the economy.

Kelley spoke to the Senate Banking Committee, LaWare to a housing group.

Also, a report by respected Washington consultants and Fed watchers Johnson Smick International said some Fed officials believe that the economy could bounce back stronger than generally anticipated.

“Senior officials make clear the ‘increasing possibility’ that the next three quarters could show quite strong U.S. production,” according to the confidential report, dated Tuesday. A copy was obtained by Reuters.

The Fed has been pushing interest rates lower since last fall, as the economy has sunk into recession. The Fed’s key short-term rate, its discount rate, has been cut from 7% in December to 5.5%. That has pulled most short-term market interest rates lower.

Many bond market traders had expected the Fed to make further rate cuts to guarantee that the economy would continue to emerge from recession. But with Wednesday’s news reports, more bond traders threw in the towel, expecting that rates can rise now only if the economy recovers and the Fed declines to ease credit again.

“There continues to be fears of a strong economic recovery and what comes along with that--inflationary pressures,” said Kevin Flanagan, economist at Dean Witter Reynolds. Inflation erodes the returns of fixed-return investments such as bonds.

Bond experts have cautioned for weeks that yields were likely to rise as traders bailed out, figuring they guessed wrong on additional rate cuts. However, many experts also believe that the bond market will stabilize if investors are shown that inflation won’t rage as the economy rebounds.

Traditionally, inflation drops in the first year of a recovery, as businesses refrain from raising prices.

Today, the government will report on wholesale inflation and retail sales for May. On Friday, reports are due on May industrial output and consumer inflation.

Even if the statistics confirm a significant economic rebound--prompting another surge in bond yields--many analysts believe that the rate rise will prove temporary and that buyers will emerge to snap up yields over 8.5%.

In the stock market, meanwhile, the rise in interest rates has caused renewed anxiety. But stocks held up reasonably well Wednesday, as investors weighed the good news of an economic recovery against the bad news of higher rates.

Though the Dow industrials finished with a 23.92-point loss at 2,961.99, the market’s ability to recoup half its intra-day decline cheered some analysts.

Also, while declining issues outnumbered gainers 1,238 to 364 on the New York Stock Exchange, trading volume was a moderate 166.50 million shares, up from Tuesday’s 161.61 million. That suggested no panic.

Strong economic growth could mean a sharp recovery in corporate profits. Historically, as recessions end, investors stop worrying about interest rates and focus on companies’ profit outlook.

Nonetheless, experts warned that higher bond yields in the near future will increase the attraction of bonds at the expense of stocks.

“I think it’s pretty clear the Fed is no longer our friend,” said analyst Larry Wachtel at Prudential Securities. Bond yields “are now at a level at which people will begin to switch out of stocks and into bonds,” he said.

Among stock market highlights:

* Most broad market indexes showed slightly greater losses than the Dow. The Standard & Poor’s 500 dropped 4.40 points, or 1.2%, to 376.65. The NASDAQ composite lost 5.57 points, or 1.1%, to 491.05.

* Some big-bank stocks dropped on worries about interest rates and on profit taking. Wells Fargo slid 2 to 90 5/8, First Interstate 1 1/8 to 37 1/4 and First Chicago 5/8 to 26 7/8.

* Many tech stocks were broadly lower, as investors continued to pull away from the group, one of the better performers early in the year. Semiconductor stocks were hurt by a report of lower industry-wide orders in May. Intel fell 1 7/8 to 49 3/8, Texas Instruments 1 1/4 to 34 1/2 and Advanced Micro Devices 3/4 to 12 3/4.

Among other techs, Computer Sciences fell 1 3/8 to 66 3/8, Teradata 1 to 14, Tekelec 2 to 18 1/2 and Apple 2 1/4 to 42 3/8.

* Industrials held up reasonably well, suggesting investors were reluctant to sell the stocks as expectations grow for a strong recovery. Ford eased 1/2 to 35 1/4, Alcoa 1/4 to 66 7/8 and International Paper 7/8 to 70 3/8.

* Oil and gas stocks were among the worst performers, as Oppenheimer & Co. analyst Paul Ting said price weakness and lower U.S. oil consumption could depress the companies’ second-quarter profits. Texaco fell 1 to 62 7/8, Chevron 1 1/2 to 71, Arco 1 1/2 to 119 and Columbia Gas 1 1/4 to 36 1/2.

* TCBY Enterprises plunged 1 3/4 to 6 3/4. The yogurt chain said one of its largest franchisees, in Chicago, filed for bankruptcy protection.

In overseas markets, German stocks eased as the market took a breather after recent gains. The 30-share DAX average ended 14.96 points lower at 1,700.84.

British shares closed lower, with traders gloomy because their hopes of more cuts in interest rates were fading. The Financial Times 100-share average lost 22.4 points to close at 2,520.2.

In Tokyo, weak yen and soft bond markets pulled stock prices down. The Nikkei average fell 179.90 points to 24,482.69.

In Mexico City, the Bolsa index fell 26.36 points to 1,072.07, or 2.4%--the fourth consecutive loss--on profit taking after 15 weeks of gains. In the United States, the Mexico Fund tumbled 1 3/4 to 20 1/8.

Currency The dollar was up against most foreign currencies, but the strength was felt most versus the German mark.

Against the Japanese yen, the dollar finished at 141.45 in New York, up slightly from 141.25 late Tuesday. The dollar also closed at 1.531 Swiss francs, up from 1.516.

The German mark is suffering largely because traders are increasingly bearish about Germany’s ability to keep its economy on track. Traders are discovering that the reunification of Germany “is not a gold mine . . . that it has had its problems,” said Kevin Logan, economist for Swiss Bank Corp.

Commodities

In commodity markets, meanwhile, wheat futures reached a 10 1/2-month high on the Chicago Board of Trade after the government lowered its wheat crop estimate and guaranteed $1.5 billion in loans to help the Soviet Union buy U.S. grain.

Wheat futures settled 1 cent lower to 5 cents higher, with the contract for delivery in July at $3.015 a bushel, the highest daily settlement for a near-term wheat contract in Chicago since July 26.

Other grain and soybean futures ended mixed.

Elsewhere, gold futures settled 70 cents to $1.10 lower on New York’s Commodity Exchange, with June at $370.20 an ounce. Silver was 1.4 to 1.5 cents lower, with July at $4.49.

On the New York Merc, July-delivery contracts of light sweet crude oil ended 9 cents higher at $20.05 a barrel.

Market Roundup, D6

DECIMAL STOCK PRICING CONSIDERED

The Securities and Exchange Commission considers using decimals instead of fractions in stock price listings. D2