Disappointing Auction Pushes Bond Yield Up : Market Overview

Weaker than expected demand for the new 30-year bond wiped out early gains and pushed long-term bond yields higher.

* The Dow Jones industrials fell as nervous investors ignored a solid report on inflation and sold issues that jumped in value during the previous session’s record rally.

* The dollar continued its nose-dive against the Japanese yen, falling to another postwar low.

Credit

Early in the day, long-term Treasury bond yields dropped to a new record low of 6.39% in euphoric morning trading after the Labor Department reported an unexpected 0.2% drop in the July producer price index.

But yields firmed to a closing 6.43% following the final leg of the Treasury’s regular quarterly refunding, ending three days of sales to replenish government coffers. On Wednesday, the bond’s yield closed at a 6.42%. The benchmark bond’s price ended the day down 1/8 point, or $1.25 per $1,000 in face value. Prices and yields move in opposite directions.

The new 30-year bonds went for an average yield of 6.33% and a high of 6.35%. Though the lowest rate since the Treasury began regularly issuing 30-year bonds in 1977, traders were expecting the yield at auction to be even lower. Bids totaled $23.5 billion.

“When the results came out, they were a little bit disappointing,” said Jim Kenney, head bond trader at Prudential Securities Inc.

The bond’s price solidified later in the afternoon and analysts pointed out that underlying fundamentals for bonds were still very good.

Several economic reports Thursday morning supported that view, notably the drop in prices paid to producers last month, which followed a 0.3% decline in June.

It was the first back-to-back decrease in the Labor Department’s producer price index in two years and represented one of the few benefits from the economy’s lackluster growth.

The government securities market generally responds favorably to falling inflation. Inflation erodes the value of fixed-income securities such as bonds.

In addition, reports on first-time job claims and retail sales also showed continued slow economic recovery, reinforcing a view that interest rates are likely to remain low.

The federal funds rate, the interest on overnight loans between banks, was quoted at 3.0%, up from 2.9% late Wednesday.

Stocks

Pressure on stocks intensified after bond prices shed their gains in reaction to the poor Treasury bond auction. Gold stocks were hurt by a slide in bullion prices.

The Dow Jones industrial average fell 14.26 points to 3,569.09, on Big Board volume of 278.53 million shares, up from the previous session’s 268.33 million. Declining issues outnumbered advances by about 5 to 4 on the New York Stock Exchange.

Analysts said market players were worried by the high price of stocks.

“It was a profit taking opportunity. We’ve had about all the good news we’ll have for a long time,” said Michael Metz, an investment strategist at Oppenheimer & Co. “If you don’t sell now, when can you?”

Investors sold issues that ran up Wednesday, when the Dow average and the NASDAQ index hit record highs--the second time this week.

“There is concern that the market is richly priced and needs a constant diet of good news,” Metz said.

In trading highlights:

* The inflation data sent gold stocks tumbling. Gold is considered a hedge against inflation. Newmont Mining sank 3 to 47 3/8, Homestake Mining lost 7/8 to 18 3/8 and Newmont Gold was off 3 to 47 3/8.

* T2 Medical skidded 5 1/8 to 8 1/2 after the company said it found accounting irregularities and errors in its accounting, resulting in lower quarterly earnings. Its chief executive resigned.

* The so-called cyclical stocks, those of companies whose fate is closely tied to the economic cycles, fell on the price data. Caterpillar fell 1 to 81 3/8 and Ford lost 3/8 to 52 3/8.

* Medical stocks improved after tumbling Wednesday on concern about the upcoming health-care reform. United Healthcare rose 4 to 56 3/4 and HMO America shot up 2 3/4 to 35 7/8. US Healthcare, which trades on the NASDAQ index, rose 4 1/4 to 45 1/2.

The market shrugged off gains abroad. German share prices gained more than 2% on high volumes of mostly foreign buying. The blue-chip DAX average closed up 39.15 points at a three-year high close of 1,904.95. Tokyo’s 225-share Nikkei average gained 32.71 points to end at 20,765.28. In London, the Financial Times 100-share average closed 3.0 points firmer at 3,009.1, beating Wednesday’s previous record.

Other Markets

The dollar dipped to 102.91 Japanese yen in late New York trading from 103.64 Wednesday--the previous post-World War II low.

Erik Nickerson, a foreign exchange economist at Bank of America, said the yen was benefiting from the uncertainty surrounding the European currencies since the Continent’s system of exchange rates was diluted last week. In addition, he said, fallout continued from Japan’s announcement Wednesday of a 28% jump in its trade surplus in July.

“Psychologically, the market uses a number like that as another rationale to buy it,” he said of the yen.

A trade surplus bolsters the value of the yen, since businesses need to buy more of the currency to pay for greater imports.

In New York, the British pound closed at $1.467, cheaper than Wednesday’s $1.470.

The greenback fell to 1.716 German marks, down from 1.723 Wednesday.

In commodities trading, the favorable producer price index sent precious metals futures sharply lower on the Commodity Exchange in New York, said Peter Cardillo, research director at Westfalia Investments Inc.

Gold for current delivery closed at $367.40 an ounce, off $7.90 from Wednesday’s close. Silver for current delivery closed at $4.550 an ounce, off 12 cents.

Market Roundup, D8