After Auction, Bonds Sell Off; Dow Loses 7.56 : Market Overview

* Bond prices plunged--sending interest rates soaring--after incoming White House Chief of Staff James A. Baker III declared that lower tax rates should be a key to Bush’s reelection campaign.

Investors, worried about the economic consequences of lower taxes, pushed the price of the Treasury’s 30-year bond down 1 5/32 point, or $11.56 per $1,000, in a stunning selloff.

* The stock market appeared confused by the bond rout, and the Dow Jones industrial average fell 7.56 points to close at 3,313.27. The Dow transportation index fell to a new 1992 low.

Credit

Baker’s comments about lower taxes frightened bond investors by raising the specter of either larger federal deficits or a renewal of rapid economic growth--or both.

Bond yields had been plunging lately on expectations that economic growth would remain weak, thus keeping inflation and interest rates down.

Further complicating the bond market Thursday was the Treasury’s quarterly auction of 30-year bonds. Though the auction went well--the new bonds were sold at an average yield of just 7.29%--that supply weighed on the market as investors suddenly scrambled to dump older bonds after Baker’s comments.

By the close, the yield on existing 30-year T-bonds had zoomed to 7.41%, up from 7.32% on Wednesday. Yields on shorter-term bonds also rocketed.

Baker’s speech overshadowed a good inflation report earlier in the day: The government said consumer prices rose just 0.1% in July.

The bond market also failed to take comfort late in the day from reports of lower early August car sales, which pointed to a continuing weak economy.

Analysts said today will be crucial in determining whether the bond market’s optimism of recent weeks remains strong, or whether investors will exit bonds as quickly as they rushed into them.

The federal funds rate, the rate on overnight loans between banks, rose to 3.313% from 3.25% Wednesday.

Stocks

While Baker’s comments about lower taxes should have been viewed positively by stock investors, the selloff in bonds had a “psychological impact” on stocks, said analyst A. C. Moore at Argus Investment Management.

What’s more, a wave of computerized program selling hit stocks shortly after the collapse in bonds, said Hildegard Zagorski, vice president at Prudential Securities Co.

By the close, though, the market mostly appeared befuddled. While losing issues outnumbered winners 9 to 8 on the New York Stock Exchange, the NASDAQ composite index of smaller stocks closed up 0.14 point at 570.99.

NYSE volume was 185.75 million shares, up from 176.04 million Wednesday.

David Holt, director of technical research at Wedbush Morgan Securities, said that until the bond selloff, the stock market seemed to be at a standoff. While there are no major concerns to get people out of the market completely, he said, there also are “no significant incentives for them to make any commitments,” he noted.

Whether the turnaround in bonds changes that remains to be seen. Though investors don’t want to see higher interest rates, they may be intrigued with the prospect that lower taxes could help revive the economy down the road.

Among the market highlights:

* Transportation stocks were mostly lower, pulling the Dow transports index to a new 1992 low of 1,244.06, off 5.56 points. The transports index has historically been watched as an early barometer of bull and bear markets, because transport companies are so sensitive to economic swings.

Losing issues included Conrail, down 2 3/8 to 81 1/8; American President, off 1 1/8 to 44 3/8, and Federal Express, down 1 to 40 1/8.

* Industrial stocks in general continued their free-fall of the past week, a reaction to the weak economy. Paper and cardboard companies took the big hit on worries about rising inventories of some paper and board products. Stone Container fell 1 1/8 to 16 1/2, Georgia Pacific dropped 2 to 51, Louisiana Pacific was off 1 at 42 1/8, and Weyerhaueser fell 1 3/8 to 31 1/2.

* Metal producers also sank. Copper producer Phelps Dodge dropped 1 1/4 to 46 3/4, Reynolds Metals lost 3/4 to 54, nickel giant Inco fell 3/8 to 27 1/4, and Bethlehem Steel gave up 3/8 to 12 1/8.

* Many gold stocks dropped again, as gold’s selloff continued. Newmont Gold was off 1 at 39 7/8, and Homestake Mining eased 1/4 to 12 1/2.

* Energy stocks rose, extending their recent gains. Investors appear to be betting on a seasonal rise in oil and gas prices this fall. Chevron rose 1 1/4 to 73 1/2, Arco gained 1 3/4 to 115 1/8, Unocal rose 1 to 27 3/4, and Baker Hughes advanced 3/4 to 23 1/4.

* Technology stocks also bucked the trend. Cabletron Systems rose 2 1/8 to 54 1/2, Novell gained 1/2 to 50 3/4, Adobe Systems was up 1 1/8 to 36 5/8, and Intel jumped 3/4 to 58 1/2.

But American Software lost 4 3/8 to 9 1/4 after issuing a disappointing quarterly earnings forecast.

* Cable TV giant Tele-Communications zoomed 1 1/8 to 19 1/4 in active NASDAQ trading. The company a day earlier reported a strong increase in quarterly profits.

Overseas, Tokyo’s losses continued to pile up, though at a slower pace. The Nikkei average lost 5.62 points to 14,768.17, yet another 77-month low.

In London, the Financial Times 100-share average closed up 14.9 points at 2,318.0. In Frankfurt, the DAX average lost 12.03 points to close at 1,540.98.

Currency

The dollar fell against most major currencies as traders tested the waters to see whether central banks would intervene again to prop up the U.S. currency.

The rise in bond yields failed to support the dollar. By the close in New York, the dollar was at 1.455 German marks, down from 1.463 on Wednesday, and at 126.50 Japanese yen, down from 127.30.

Commodities

Pork belly futures prices leaped the permitted daily limit of 2 cents a pound on the Chicago Mercantile Exchange amid speculation about future sales of U.S. pork to the former Soviet Union.

It was the third limit advance for pork bellies since the government on Aug. 3 offered to subsidize sales of 66 million pounds of U.S. pork to the Commonwealth of Independent States.

Pork bellies for August jumped 2 cents to 37.32 cents a pound.

Meanwhile, oil prices rose on the New York Merc, with light, sweet crude oil for September delivery rising 26 cents to $21.34 a barrel.