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

Treasury bond yields took one of their sharpest slides in months on Tuesday, as a bleak consumer-confidence report all but assured another official Federal Reserve interest rate cut.

Meanwhile, the stock market rallied again as rates fell, and the dollar plunged.

The yield on the Treasury’s 30-year bond tumbled to 7.89% from 8.03% on Monday. The 30-year bond yield, closely followed as an indicator of general trends in interest rates, has been as low as 7.8% recently, and now seems headed again for that level or lower, many bond traders say.

The main catalyst for the drop in rates was a disastrous report on consumer confidence by the private Conference Board, which surveys 5,000 households monthly. The group said its overall index of consumer confidence plummeted from 72.9 in September to 60.4 in October--a level indicative of a new recession. (Story, A1.)

The unanticipated leap in consumers’ pessimism makes it imperative that the Federal Reserve cut interest rates again to help the economy, 9many experts argue. In particular, “Consumers’ assessment of the job situation is terrible,” said Edward Yardeni, economist at brokerage C. J. Lawrence Inc.

The irony of the consumer confidence report was that it came on the same day that the Commerce Department announced that gross national product rose at a 2.4% rate in the third quarter, suggesting that the recession had ended.

However, most economists say that gain in GNP reflected an early summer burst of activity that then faded. Lower interest rates may not help revive the economy quickly from this point, but Wall Street now believes that rates are the only weapon the government can quickly unleash.

Yardeni said the Fed could cut its benchmark short-term interest rate, the “discount” rate, to 4.5% from the current 5% by the end of this week.

Reflecting those expectations, other short-term interest rates declined broadly on Tuesday to the lowest levels since 1977. The rate on six-month Treasury bills, for example, dropped to 4.92% from 4.99% Monday.

Fed Chairman Alan Greenspan seemed to set the stage for another interest rate cut on Monday, when in a speech he described the economy as struggling.

Stocks

The stock market continued to hang on the good news of expected interest rate cuts, ignoring the other side of the coin: An apparently stalled economic recovery caused by frightened consumers.

The Dow Jones industrial average rose 16.32 points to 3,061.94, after a 40.70-point rise on Monday. The Dow is just a small move from its all-time high of 3,077.15.

On the New York Stock Exchange, 1,027 stocks rose while 605 fell. Volume grew to 192.8 million shares from 162 million Monday.

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

Among the market highlights:

* Small stocks advanced much more sharply than the Dow. The NASDAQ composite index of smaller issues rose 5.10 points, or 1%, to 534.51. NASDAQ issues were led by biotech firm Somatogen, up 6 1/2 to 40 1/2. Other biotechs also gained.

* Interest rate-sensitive issues soared on optimism about lower rates. Mortgage banker Countrywide Credit jumped 2 1/2 to 32 1/4, Wells Fargo added 2 1/8 to 68 7/8, and insurance firm AIG rose 1 5/8 to 85 7/8.

* Defense contractors were strong. General Dynamics jumped 1 5/8 to 50 7/8 after South Korea signed a deal for 120 F-16 fighters. Other defense gainers included Martin Marietta, up 1 3/8 to 52 1/4, and United Technologies, up 1 to 48 1/4.

* Among new issues, Southland-based diet-center operator Jenny Craig went public at 21 a share and rocketed to close at 24 on the New York Stock Exchange.

* Time Warner rose 3 1/4 to 89 1/2 after two Japanese companies agreed to invest $1 billion in the company. Also, 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 the parent.

Overseas, strong demand for auto stocks pushed the Frankfurt market’s DAX average up 13.94 points to 1,590.75. But 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.

Tokyo’s 225-share Nikkei average ended up 238.89 points, or 1%, at 25,140.61.

Currency

The dollar sank as currency traders threw in the towel on any hopes that the U.S. economy might be strengthening.

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

“Interest rates are the only tool left to keep the boat afloat,” said Donney, but any hopes of higher rates were dashed by the dismal consumer confidence report.

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 Japanese yen, down from 1.32.29 Monday. The British pound soared to $1.729 from Monday’s $1.694.

Commodities

Grain and soybean futures 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.

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.

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

Precious metals rallied modestly on New York’s Comex. December gold rose 30 cents to $361.10 an ounce; December silver rose 3 cents to $4.11.

Market Roundup, D6