Bonds Surge on Hopes for Interest Cut : Markets: Continued bad economic news sparks speculation that the Federal Reserve will act soon.

Bond prices staged one of their strongest rallies in months Tuesday as bleak reports about the economy spurred growing speculation that the Federal Reserve will cut interest rates this week.

Bond yields, which move inversely from price, plunged. Rates on the bellwether 30-year Treasury bond fell below 7.9%, and short-term Treasury bill rates dropped to their lowest levels since 1977. Stocks rose, but the dollar fell.

The Treasury market rallied after the Commerce Department reported that the gross national product rose at a 2.4% rate in the third quarter, compared to the 2.6% rate that had been anticipated.

In addition, the Conference Board said consumer confidence plunged in October to its lowest level since the height of the Gulf War in February.

The price of the Treasury’s key 30-year bond climbed 1 19/32 point, or $15.94 per $1,000 in face amount. Its yield, which moves inversely from price, fell to 7.89% from 8.03% late Monday.

The stock market took a choppier path but finally ended higher, with the Dow Jones industrial average up 16.32 points at 3,061.94 after a 40.70-point gain Monday.

The latest evidence that the economy is rebounding only slowly from the recession that took hold in July, 1990, led many traders to speculate that the Fed will again act to lower interest rates.

“The economic news has been pretty poor, and this is just more anticipation that the Fed’s going to ease,” said Eric Rosenfeld, managing director at Salomon Bros.

In fact, some traders expected a move Tuesday and are now anticipating a rate cut today or Thursday, he said. Previously, traders had believed that the Fed, the nation’s central bank, would wait at least until unemployment figures are published Friday.

Fed Chairman Alan Greenspan’s gloomy comments on the economy Monday contributed to the expectations of an impending rate cut.

Lower rates stimulate borrowing by businesses and consumers, boosting economic activity and typically lifting stock and bond prices.

In addition, traders were spurred by an unconfirmed report in the Washington Post that the policy making Federal Open Market Committee has given Greenspan authority to cut a key interest rate by as much as a half a percentage point.

In the secondary market for Treasury bonds, short-term maturities rose 7/32 point to 17/32 point, intermediate maturities rose 25/32 point to 1 3/16 point, and long-term issues were up 1 17/32 point to 1 19/32 point, the Telerate Inc. financial information service reported.

The movement of a point equals a change of $10 in the price of a bond with a $1,000 face value.

The federal funds rate, the interest on overnight loans between banks, closed at 5.125%, down from 5.188% late Monday.

Stocks

In the broader market, rising issues outnumbered declines by about 12 to 7 on the New York Stock Exchange. Big Board volume was a robust 192.81 million shares, up from 161.63 million Monday.

The rise came after a 40.70-point gain Monday.

“What has kept the stock market at its highs is the thinking that lower rates will stimulate more economic activity,” said Jeffrey Kaminsky, director of institutional sales at Mabon Securities Corp.

The stock market was very erratic, churning in a 39-point trading range.

Among the market highlights:

* Salomon Bros. added 2 1/4 to 28 3/8 after it reported better-than-expected third-quarter earnings. Smith Barney raised its rating and earnings estimates on the brokerage house.

* Xoma Corp. rose 1 1/2 to 19 1/2, and Centocor lost 2 to 48 1/4. A federal court jury upheld Xoma’s patent on its drug to treat a deadly bacteria infection.

* Time Warner rose 3 1/4 to 89 1/2 after two Japanese companies agreed to invest $1 billion in the world’s largest media company.

* American Television & Communications jumped 3 3/8 to 54 3/8 after it said it would consider a Time Warner offer to buy the 18% of American TV not already owned by Time.

* Some biotechnology and pharmaceutical stocks were stronger. Glaxo Holdings added 1 7/8 to 55 1/4 on expectations that its Imigran drug will receive full Food and Drug Administration approval.

* SmithKline Beecham added 2 5/8 to 60 1/4. It reported better-than-expected third-quarter results.

* Tyco Labs dropped 4 1/8 to 31 3/4 after Shearson Lehman downgraded its rating and removed it from its buy list.

The NASDAQ over-the-counter index was up 5.10 to 534.51.

Overseas, strong demand for car shares pushed stocks highers in Frankfurt, with the 30-share DAX average rising 13.94 points to 1,590.75.

Tokyo’s 225-share Nikkei average ended up 238.89 points, or 0.96%, at 25,140.61, with some 400 million shares traded.

Stock prices fell on London’s Stock Exchange, as early buying slackened. The Financial Times 100-share average fell 5.2 points to 2,553.3, pushed down by a drop on Wall Street.

Currency

Currency traders initially reacted to the likelihood of lower interest rates after the GNP report.

Lower interest rates are bearish for the dollar because they make dollar-denominated securities less attractive to investors.

The selling “just snowballed; we just couldn’t stop it,” said Randolph Donney, research director at Pegasus Econometric Group in Hoboken, N.J.

“Interest rates are the only tool left to keep the boat afloat,” said Donney, referring to a rate cut, which analysts say could come as early as today. But many expect the Fed is waiting to review the October unemployment report, due to be released Friday.

The dollar sank nearly four pfennigs against the German mark before a very slight recovery on the close. The dollar also closed sharply lower against the British pound and the Swiss franc.

In New York, the dollar closed at 1.686 German marks, compared to 1.717 marks Monday, and at 130.60 yen, down from 1.32.29 Monday. The British pound rose to $1.729 from Monday’s $1.694.

Other late dollar rates in New York, compared to late Monday’s rates, included 1.476 Swiss francs, down from 1.506; 5.7565 French francs, down from 5.856; 1,261.00 Italian lire, down from 1,283.25, and 1.123 Canadian dollars, down from 1.125.

Commodities

Grain and soybean futures prices rallied strongly late on the Chicago Board of Trade amid indications that the Bush Administration is about to offer new food aid to the Soviet Union.

On other commodity markets, livestock and meat futures fell; oil futures were mixed, and precious metals were mostly higher.

Wheat for delivery in December settled 4.75 cents higher at $3.623 a bushel; December corn was 2.75 cents higher at $2.533 a bushel; December oats rose 2.25 cents to $1.328 a bushel; November soybeans rose 7.75 cents to $5.568 a bushel.

Elsewhere, light, sweet crude oil for delivery in December settled at $23.11 per barrel, down 10 cents, at the New York Mercantile Exchange.

Precious metals rallied modestly on New York’s Commodity Exchange, reflecting expectations for lower interest rates and increased inflationary pressures. December gold rose 30 cents to $361.10 an ounce; December silver rose 3 cents to $4.115 an ounce.

Market Roundup, D6