Sliding Bond Yields Boost Stocks : Market Overview

Stocks managed to extend Tuesday’s powerful rally, but the action was mostly limited to the small stocks that missed out on the previous day’s late upturn. The Dow Jones industrial average rose 3.51 points to close at 3,404.04.

* Treasury bond prices rose strongly amid continued speculation about just how fast the economy is recovering. The interest rate on the Treasury’s benchmark 30-year bond sank to 6.78% from Tuesday’s close of 6.84%. It was the lowest closing yield since the Treasury began selling the issue on a regular basis in 1977.

Stocks

Analysts said equity investors applauded the continuing drop in interest rates, which is expected to stimulate the economy.

The underlying trend of lower rates could be an important spur for stock prices, analysts said.

“As yields go down, that makes the value of stocks go up. That’s been the driver,” said A. C. Moore, a market analyst at Argus Investment Management.

Ronald Hill, an investment strategist at Brown Bros. Harriman, said, “The most important thing now is what happens to the overall economy.”

But analysts warned about the opposite reaction in stocks if Treasury market interest rates suddenly move higher, a reversal that some fear might take place.

David Bostian, chief economist at Herzog Heine Geduld, said the rates are falling on “mistaken assumptions” about the ability of the Clinton plan to cut the budget deficit and the extent of any economic slowdown.

“The bond market is basically blind to all that and could have a sharp short-term correction,” he said.

Bradley Turner, chairman of McDonald & Co.’s investment policy committee, said: “People need to have a very keen sense of valuation here. They need to recognize that the biggest mistake you can make is overpaying for this market.”

In the broad market, advancing issues led decliners 1,264 to 622 on New York Stock Exchange volume of 272 million shares. The NASDAQ index of smaller stocks rose 6.20 to 683.92.

Among the market highlights:

* Financial stocks rose as interest rates dropped. Federal National Mortgage Assn. rose 1 to 82, and Countrywide Credit, a mortgage servicer, was up 1 1/8 to 34 7/8. Citicorp rose 1/4 to 26 3/8 and was the third most-active issue on the NYSE.

* Cigarette stocks fell after three members of Congress said they will introduce a bill to raise the 24-cent federal tax on cigarettes to $1 a pack and use the money for health care. RJR Nabisco, the most-active issue on the NYSE, was off 1/4 to 8 5/8. Philip Morris was fourth most-active and down 1 to 66 5/8.

* Oil stocks lost ground after Merrill Lynch downgraded Chevron stock to neutral from above average , citing the stock price. Chevron fell 1 3/4 to 78 1/8, Mobil lost 1 1/4 to 67 5/8, Atlantic Richfield tumbled 3 3/8 to 118 5/8, Texaco sank 2 to 62 1/4, Mobil lost 1 1/4 to 67 5/8, and Exxon fell 5/8 to 63 7/8.

* AST Research slipped 1 7/8 to 15 1/8 after the company said that it is cutting prices on personal computers and that the move is expected to reduce its near-term earnings. Bear Stearns and Alex. Brown cut their ratings on the firm.

* Qualcomm shares jumped 3 1/4 to close at 35 3/4 after Bell Atlantic Corp. said its cellular unit will use a digital technology promoted by San Diego-based Qualcomm.

* Tyco Toys rose 5/8 to close at 13 1/4 after a Salomon Bros. analyst said the New Jersey toy maker could be a target for a takeover, possibly by Mattel Inc.

* Chemtrak leaped 2 3/4 to 15 after regulators approved over-the-counter sales of the company’s cholesterol test.

In overseas trading, the London stock exchange spent most of the day in record high territory, boosted by the strong showing on Wall Street, brighter economic prospects in Britain and good company results. The Financial Times 100-share average ended up 36.3 points at a record high of 2,918.6.

Frankfurt’s DAX 30-share average closed down 3.01 points to 1,693.70.

In Tokyo, the 225-share Nikkei average was 10.33 points lower at 16,853.92.

Mexico City shares rose for the fourth session in a row, boosted by signs that interest rates are stabilizing and investment money is returning to the stock market. The IPC index rose 22.56 points to 1,612.99 in brisk trading of 108.49 million shares.

Credit

The price of the Treasury’s key 30-year bond was 3/4 of a point higher, or $7.50 per $1,000 in face amount. Bond prices and yields move in opposite directions.

Analysts said prices rose and yields stayed down as traders hoped for a reduction in the deficit and wondered where the economic recovery is.

A slower economy typically means lower inflation, which is good news for bond investors. Over time, inflation can wipe out the returns on fixed-income investments such as bonds.

“I think the market’s continued to believe that the economy is not growing rapidly but that, at the same time, the Clinton budget proposals are going to effect actual reductions in the budget deficit,” said Carol A. Stone, senior economist and assistant vice president of Nomura Securities International Inc.

Stone also believes that some new money had come into the market and that other money had shifted from shorter-term securities to longer-term ones. This meant, she said, a shift in investor psychology, with more people willing to play with the longer or 30-year maturities.

Trading was moderate, with some trading systems still not on line after the World Trade Center blast in New York, Stone said.

“There is firm demand for these securities, but prices are a little more volatile than they would be otherwise if there was a full complement of trading going on,” she said. “It’s an unusual circumstance.”

Yields on three-month Treasury bills fell to 2.98% as the discount fell 4 basis points to 2.93%. Yields on six-month bills fell to 3.10% as the discount fell 3 basis points to 3.02%. Yields on one-year bills fell to 3.25% as the discount fell 2 basis point to 3.14%.

The federal funds rate, the interest on overnight loans between banks, was 3%, unchanged from late Tuesday.

Currencies

The dollar moved higher in skittish dealings ahead of a German central bank meeting today that could lead to lower interest rates and a weaker mark.

Dealers said the market was anticipating possible official German rate cuts even though the central bank signaled otherwise Tuesday in money market operations. But the central bank delivered surprise rate cuts last month and traders said another one could not be totally ruled out.

“The market’s mood swings have been pretty dramatic lately,” said John Lyman, senior customer dealer at Bank of Tokyo. “You never can rule out a cut of some kind.”

Against the yen, the dollar tumbled in Asia after a Japanese government official was quoted as saying Japan’s monetary officials are prepared to accept the yen’s recent gains against the dollar. But the dollar rebounded somewhat in London and New York.

The dollar settled in New York at 1.6480 German marks, well above 1.6403 late Tuesday. The dollar settled at 116.65 yen in New York.

The British pound ended at $1.4505 in New York, up from $1.4470 Tuesday. Other late dollar rates, compared with Tuesday’s U.S. quotes, included: 1.5245 Swiss francs, up from 1.5223; 5.5885 French francs, up from 5.5695; 1,566 Italian lire, up slightly from 1,563, and 1.2432 Canadian dollars, down from 1.2471.

Commodities

Grain prices weakened, but only slightly, after U.S. and Russian officials put off a resolution to Russia’s agricultural debt defaults totaling more than $400 million. Russia has been unable to buy U.S. grain since late November after it fell into arrears on its government-guaranteed agricultural loans.

May corn declined a penny to $2.215 a bushel, May wheat also lost 1 cent to $3.39 a bushel, and May soybeans dropped 2.25 cents to $5.83 a bushel.

Petroleum prices rose, helped by weekly supply figures that showed a drop in gasoline inventories when many had been expecting an increase. Unleaded gasoline for delivery next month settled at 58.99 cents a gallon, up 0.65 cent, on the New York Mercantile Exchange.

Gold prices fell 80 cents on New York’s Commodity Exchange, where bullion for current delivery settled at $329 an ounce.

Market Roundup, D6