Bond Selloff Slams Stocks; Dow Falls 30.18 : Market Overview
* Stocks fell sharply as selling sentiment that had been pent up during recent rallies was unleashed. The drop was triggered by a surge in interest rates.
The Dow Jones industrial average plunged 30.18 points, or 0.9%, to 3,246.65 after hitting its 10th record high this year on Wednesday.
* Investors gave a terrible reception to the Treasury’s sale of new 30-year bonds, demanding a yield of 7.91%, well above expectations. That caused interest rates to soar across the board, sending the dollar surging as well.
Stocks
Stocks’ selloff was orderly and didn’t suggest panic, analysts said. In the broader market, declining issues outnumbered advances by 9 to 5 on the New York Stock Exchange. Trading volume slipped to 230.91 million shares from Wednesday’s 237.63 million.
Most major market indexes fell about 1%, same as the Dow industrials. The biggest loser was the Dow transportation index, which tumbled 1.4% as airline stocks sank.
The bond market’s bad day began when the Commerce Department said retail sales in January rose a steep 0.6% as demand strengthened for goods ranging from cars to building materials.
The strongest rise since a 1.2% gain last May raised bond traders’ fears that the economy will rebound quickly, pushing up interest rates.
In addition, auto sales for early February were stronger than expected. Sales of U.S.-made cars and trucks rose 23.6% in the first 10 days of February.
By the time that the Treasury announced the average yield on the new 30-year bonds it sold Thursday, it was clear that traders were fleeing the bond market to lock in profits made last summer and fall, when interest rates fell.
Ironically, analysts said some of the money leaving bonds is going into stocks, which may have helped pull the Dow back from a 40-point drop late in the day.
Indeed, many industrial stocks rose on Thursday despite the overall market loss, as investors bet that a stronger economy will revive basic-industry companies’ profits.
Among the market highlights:
* Losers were concentrated in the consumer stocks that have led the market through the last few years of weak economic growth. These stocks are ripest for profit taking, analysts noted, and investors may be leaving the safety of these growth issues to bet on those that would benefit from an economic recovery.
Among blue chip consumer issues, drug giant Merck fell 2 5/8 to 151, Philip Morris lost 1 1/8 to 74 1/2, Pepsico dropped 1 to 31 7/8, Johnson & Johnson sank 3 to 102 7/8, and Wrigley fell 1 3/4 to 72 7/8.
* Pfizer dropped 2 5/8 to 72 5/8. The drug company said earnings growth in the first half of the year is likely to be restrained by costs related to new drugs.
* Industrial issues that bucked the selloff included the auto stocks, which were buoyed by rising car sales. GM gained 3/4 to 36 5/8, Ford added 5/8 to 35 1/4, and Chrysler inched up 1/8 to 15 1/8.
* Other industrial winners included Dow Chemical, up 1/2 to 56 3/4; Phelps Dodge, up 1 1/8 to 78 1/4; Raytheon, up 3/4 to 87; Black & Decker, up 1 7/8 to 26 1/4, and Trinova, up 7/8 to 23 1/4.
* Some oil stocks were weak. British Petroleum lost 3 1/8 to 59 3/8 after reporting sharply lower fourth-quarter and full-year 1991 earnings. Chevron sank 2 1/8 to 63 3/8 on word of new layoffs.
* Airlines falling back from their recent rally included AMR, parent of American, down 1 5/8 to 72 1/8; Delta, off 2 1/2 to 66, and UAL, parent of United, down 4 1/4 to 141 5/8.
Meanwhile, Mesa Airlines rose 1 3/4 to 22. Traders said Lehman Bros. touted the company.
* Casino operator Mirage Resorts gained 1/2 to 31 3/8. It signed agreements to develop themed gaming facilities for Indian tribes in Kansas and Washington.
* Among Southland issues, home builder Kaufman & Broad fell 1/2 to 24 3/8. After the close the company announced plans to issue 7.5 million new shares of a special type of stock. Elsewhere, home video distributor Vidmark sank 1 to 6 after reporting flat quarterly earnings.
Overseas, stocks closed lower in Tokyo for the third consecutive day in choppy trading. The 225-share Nikkei average was down 150.62 points at 21,391.02.
London’s Stock Exchange ended barely changed, with the Financial Times 100-share average 1.1 points lower at 2,522.6. In Frankfurt, the DAX average was up 2.47 to 1,681.39.
Credit
Bond yields reached new highs for the year in the face of encouraging economic news and limp demand for new 30-year Treasury bonds.
In trading after the bond auction, the price of the Treasury’s 30-year bond closed down 1 1/8 points from Wednesday, or $11.25 per $1,000 face amount. That sent the yield soaring to 7.91% from 7.8%.
Among shorter-term issues, the yield on three-year Treasury notes jumped to 5.74%. That note’s yield had been 5.38% just one week ago.
Kenneth Kim, an economist at Stone & McCarthy Research Associates, said traders were dumping bonds on the belief that a better economy will keep the Federal Reserve from lowering interest rates further.
“The retail sales report, as well as stronger domestic car sales, are sort of quashing sentiment for a near-term easing by the Fed,” Kim said.
Still, many economists believe that the economy isn’t strong enough to justify sharply higher long-term interest rates. When this bout of bond profit taking has run its course, yields are likely to drop, they say.
The federal funds rate, the rate on overnight loans between banks, rose to 4% from 3.81%.
Currency
The dollar rose sharply against major currencies on evidence of a rebound in the U.S. economy.
Strength in the economy would deter the Fed from easing rates further, making dollar-denominated investments more attractive.
John McCarthy, chief currency dealer at ABN-AMRO Bank in New York, said traders bid the dollar higher in hectic dealings shortly after the release of the retail sales report.
But the greenback failed to rise above its recent highs against key currencies, however, suggesting that traders are still wary about whether the recovery is real.
In New York, the dollar soared to 1.624 German marks from 1.607 Wednesday. It also rose to 127.65 Japanese yen from 127.40.
The British pound was at $1.773, down from Wednesday’s $1.789.
Commodities
Cocoa futures sagged to a 5 1/2-month low on signs of unexpectedly large shipments from the Ivory Coast, the world’s largest producer.
Cocoa for March fell $16 on New York’s Coffee, Sugar & Cocoa Exchange to $1,075 per metric ton, the lowest price for near-term delivery since Aug. 30.
Elsewhere, light, sweet crude oil for March surged 41 cents to $19.68 a barrel on the New York Merc as OPEC ministers tried to strike a deal cutting back production.
On New York’s Comex, gold fell $2.20 to $355.90 an ounce, and silver slipped 1 cent to $4.20.
