Yields Soar, Dow Falls as Fed Stands Pat : Market Overview
* Treasury bond yields rose sharply for a third consecutive session after the Federal Reserve again disappointed investors by failing to cut interest rates.
* The weak bond market sparked an afternoon selloff in stocks, sending the Dow Jones industrial average down 25.94 points to 3,152.25, its lowest close since Dec. 27.
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Investors threw in the towel on hopes for a further Federal Reserve cut in interest rates in the near term.
After last Friday’s dismal September employment report, bond traders had assumed that a Fed cut was imminent. But hopes have dwindled daily with no sign of Fed activity in the money markets.
On Wednesday, when the Fed failed to act during its customary time for market intervention, traders began selling heavily.
Treasury yields rocketed across the board, with the biggest increases in the intermediate range of seven- to 10-year notes.
On the Treasury’s benchmark 30-year bond, the yield shot up to 7.48% from 7.41% Tuesday. The bond’s price fell 13/16 point, or nearly $8.13 per $1,000.
Since last Thursday, the 30-year bond yield has soared from 7.32%.
Yields also jumped on short-term securities. The yield on six-month T-bills rose to 2.99% from 2.93% Tuesday.
The central bank’s silence is “being regarded as a sign that the Fed won’t be easing policy before Election Day,” said William Sullivan, analyst at Dean Witter Reynolds in New York.
Paul McCormack, managing director of government securities trading at Chase Securities, said yields have jumped largely because traders had pulled them down sharply last week, believing that a rate cut was a sure bet. “We’d gotten way ahead of ourselves,” he said.
The disappointment soured the Treasury’s afternoon auction of new seven-year notes, which traders said was poorly received even though the average yield of 6.01% was down from 6.44% at the auction July 8.
The fed funds rate, the rate on overnight loans between banks, rose to 3% from 2.875% Tuesday.
Stocks
The market meandered in a narrow range in the morning, then began to fall sharply after the Treasury announced the disappointing results of its seven-year note auction, traders said.
By the close, declining issues outnumbered advances 10 to 7 on the New York Stock Exchange. Volume came to 184.38 million shares, a figure traders said was depressed by the absence of many players because of the Jewish Yom Kippur holiday.
The Dow’s loss of 25.94 points, to 3,152.25, wiped out the last of its gain for the year. The index had closed at 3,168.83 Dec. 31.
Many analysts expect the market to continue to slide in the weeks before the election, as uncertain investors step to the sidelines.
Among Wednesday’s highlights:
* The Dow was kicked lower by IBM, off 1 3/8 to 78 3/8; International Paper, off 1 5/8 to 60; and GM, down 7/8 to 30.
Salomon Bros. cut its earnings estimates on GM to just $1.50 a share next year from the previous $2.75. Salomon also cut estimates on Ford, which fell 1 1/4 to 36 1/4.
Among other industrial issues, most paper companies followed International Paper lower. The group is considered sensitive to economic swings. Kimberly Clark dropped 1 1/2 to 51 3/4, Georgia-Pacific lost 1 7/8 to 49, and Scott Paper sank 1 to 36.
* Some classic growth stocks also had a bad day. Coca-Cola tumbled 1 1/4 to 37 1/2. The company recently estimated that international sales will be flat in the current quarter.
Another hot growth issue, Home Depot, sank 1 3/8 to 52 1/8.
Also under pressure was Philip Morris, off 1 1/8 to 81 1/2. It had no comment on rumors that it will bid for Dutch brewer Heineken.
* Many financial stocks were weak, as the Fed refused to cut interest rates. Citicorp fell 1/4 to 14 1/2 one day after its president resigned unexpectedly. Other financial losers included Merrill Lynch, off 1 7/8 to 46 1/2; Wells Fargo, down 2 1/8 to 62 3/8, and Federal National Mortgage, down 1 to 63 1/2.
* Among tech issues, software firm Borland International plunged 6 5/8 to 30 3/4 after analysts said sales of the firm’s new software products have been disappointing. But biotech equipment maker Applied Biosystems jumped 2 3/8 to 19 3/8 on word of a takeover offer from Perkin Elmer.
* Among the few big gainers, Smith’s Food & Drug leaped 1 3/4 to 34 3/4. Kidder Peabody upgraded the retailer to buy from hold.
Elsewhere, major insurance stocks resumed their climb on expectations of higher premium rates. AIG jumped 2 1/8 to 109 1/4, and General Re gained 2 1/8 to 109 1/8.
Overseas markets regained some of their recent major losses. London’s 100-share Financial Times index rose 28.70 points to 2,517.10. In Frankfurt, the 30-share DAX index ended 15.75 points higher at 1,436.05. In Paris, the CAC 40 jumped 41.64 points to 1,654.15.
But in Tokyo, the 225-share Nikkei average lost 156.36 points to 17,111.74.
Currency
The dollar jumped against most major currencies, partly in reaction to a slight easing in French short-term interest rates--which raised new hopes that high European rates will begin to fall soon.
In New York, the dollar closed at 120.40 Japanese yen, up from 119.70 Tuesday. It zoomed to 1.449 German marks from 1.427.
Commodities
Copper futures prices sank, and analysts predicted that sluggish demand and rising supplies soon would push the metal’s price below $1 a pound.
Copper for October delivery fell 0.85 cent to $1.007 a pound on New York’s Comex, wiping out most of the gains posted earlier this week.
Elsewhere, Comex gold rose 90 cents to $351 an ounce; October silver slipped 1 cent to $3.72.
Light, sweet crude oil for November rose 8 cents to $21.89 a barrel on the New York Merc.
