CLINTON BUDGET AFTERMATH : Passage Sends Stocks Soaring and Sinks Bond Yields to Historic Lows
Bond yields sank to historic lows and stock prices hit record highs Monday, the first day of trading after Congress’ narrow approval of President Clinton’s budget.
Whether the markets’ response reflected a favorable view of the Clinton program, however, was a matter of significant debate on Wall Street. Some analysts suggested that interest rates fell only because investors believe that the Clinton plan ultimately will hurt the economy.
In the bond market, the yield on the benchmark 30-year Treasury bond plunged from 6.52% on Friday to 6.46% on Monday, the lowest yield since the Treasury began selling 30-year bonds in 1977.
Meanwhile, the Dow Jones industrial average jumped 15.65 points to 3,576.08, a new closing high that eclipsed the old record of 3,567.70 set July 26.
The NASDAQ composite index of mostly smaller stocks also hit a new high, inching up 0.41 point to 718.49.
The bond market rally was all the more remarkable because the government will sell $38.5 billion in new notes and bonds this week at its quarterly “refunding,” which begins today. Interest rates often rise before such big bond sales because the market fears a temporary oversupply of securities.
But this time, Wall Street bond dealers appear to believe that investors’ hunger for current long-term yields will translate into extremely heavy demand for the new bonds. Hence, dealers were hoarding bonds Monday, especially the 30-year issues--which the Treasury won’t offer for sale again until February.
“Some dealers are getting all bulled-up in anticipation of the refunding,” said Anthony Karydakis, analyst at First Chicago Capital Markets.
But while the White House has sought to portray falling interest rates as a symbol of investors’ belief in Clinton’s deficit-reduction program, many economists insist that rates are falling for a different reason: the expectation that the tax hikes in the program will further slow the economy.
“History tells us that when you raise taxes you hurt the economy,” said David Jones, economist at bond dealer Aubrey G. Lanston & Co. in New York.
If consumer and business spending remains weak, so too should demand for loans, which means interest rates may continue to slide, Jones said. Thus, many money managers and individual investors are eager to lock in current yields, he said.
The bond market is being helped by other factors as well, Jones noted, including the renewed decline in interest rates in recession-wracked Europe, and the ongoing search for higher yields by the large number of American savers still in low-yielding bank accounts.
Moreover, the Treasury’s spring decision to limit new 30-year bond offerings to two a year, from quarterly, is unquestionably boosting demand for that issue, analysts said. After this week’s 30-year bond sale (on Thursday), new 30-year issues won’t be sold again until February, though investors will be able to buy older bonds in the market.
First Chicago’s Karydakis said Monday’s heavy buying of 30-year bonds was dealer-driven and was in part an attempt to whip up investors’ appetite for that security. “They’re trying to give the impression that this is your last chance to buy bonds,” Karydakis said.
Indirectly, the slide in U.S. interest rates helped boost stock prices to new highs Monday, analysts said. Lower rates automatically cause more investors to look to the stock market for higher returns.
Some experts also suggested, however, that more stock investors may be rejecting the consensus view that the Clinton tax increases will be a severe drag on the economy.
“I’m beginning to think we could have a real nice rally now . . . to 4,000 on the Dow by the end of the year or January,” said Suresh Bhirud, head of investment firm Bhirud Associates in Stamford, Conn.
Because only the highest-earning Americans will be hit with higher income taxes, while millions more low-income households will actually get a tax cut because of more generous tax credits, consumer spending overall may be higher than expected in 1994, some Wall Streeters acknowledge. That could boost corporate earnings.
“It may be, with this law, that you’re putting money into the hands of people who will spend it,” said William Gross, investment strategist at Pacific Investment Management in Newport Beach.
Moreover, Gross said, wealthier Americans hit with a bigger tax bite may be more likely to cut savings rather than crimp their spending. So even in that group, the supposed drag effect on the economy may not materialize.
In any case, Aubrey Lanston’s Jones noted that it is illogical for the bond market to continue signaling a slowing economy while the stock market is signaling a healthier economy. “One of these two markets has it wrong,” he said.
Among Monday’s stock market highlights:
* Winners topped losers by 3 to 2 on the New York Stock Exchange, although volume remained slow at 232 million shares.
* Brokerage stocks rallied sharply on the expectation that the bull market has further to run. Merrill Lynch rose 3/4 to 89 1/4, Primerica surged 1 3/4 to 56 3/4, Charles Schwab rose 2 to 31 5/8 and Salomon gained 1 3/8 to 44 5/8.
* Technology stocks, which often track economic trends, were strong. Compaq gained 2 1/8 to 52 3/4, Hewlett-Packard rose 2 to 73 1/2, Texas Instruments jumped 1 7/8 to 77 7/8 and Computer Associates added 1 3/8 to 31 1/4.
* Among industrial issues that also would gain from a stronger economy, Clark Equipment rose 1 to 39 1/4, Kennametal added 3/4 to 36 3/4 and Briggs & Stratton surged 2 7/8 to 77 1/8.
* Some issues that would benefit from improved consumer spending saw buying. Whirlpool leaped 2 1/8 to 65 3/8, McDonald’s added 1 to 52 1/2 and Chrysler rose 1 1/8 to 43.
In other markets Monday:
* In the bond market, yields on shorter-term securities fell with 30-year yields, though not as dramatically.
The yield on three-year Treasury notes closed at 4.37%, down from 4.39% on Friday. The Treasury will sell $16.5 billion in new three-year notes today, the first stage of its quarterly refunding.
* Gold and silver prices shot higher, rebounding from last week’s vicious selloff.
September gold futures on New York’s Comex jumped $6.90 to $384 an ounce. September silver futures gained 14.6 cents to $4.72 an ounce.
* Oil prices pulled up from recent three-year lows, in part because a rash of refinery problems boosted gasoline prices. September crude oil futures rose 28 cents to $17.55 a barrel on the New York Merc.
* The dollar rose slightly against European currencies and the Japanese yen. The dollar closed in New York at 1.697 German marks, up from 1.696 on Friday.
Against the yen, the dollar closed at 104.90, up from 104.43 on Friday.
Market Roundup, D8
