Profit Taking Slams Bonds but Stocks Rise : Market Overview
* Interest rates surged Thursday as sellers rushed to cash in on bonds’ recent tremendous rally. A spate of encouraging economic reports hurt bond market sentiment.
* Stocks advanced, halting their two-day selloff, as investors focused more on positive economic news than on rising interest rates.
* Gold continued to rebound.
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Long-term bond yields shot higher, as stronger than expected economic reports encouraged some speculators to bail out of bonds.
The yield on the Treasury’s benchmark 30-year bond jumped to 5.96% at the close, up from Wednesday’s 5.86%, which had been the lowest yield in the 16-year history of the bond.
It was the T-bond yield’s biggest one-day jump since May 13, when it rose to 6.95% from 6.85%.
Traders have been warning for weeks that the deep slide in bond yields was vulnerable to a reversal because of the recent heavy, short-term speculation in the market. The 30-year bond yield had been 6.44% as recently as Aug. 12.
A key trigger for selling Thursday: news that new claims for unemployment benefits last week were the lowest in four years.
Also, in another vote of confidence for the economy, the Commerce Department reported that U.S. businesses plan to boost spending on plants and equipment this year by 7.1%, following a 3.4% increase last year.
Both reports suggested the economic outlook is stronger than many bond buyers have assumed, which means interest rates could begin to move up sooner than later.
Traders also said a hot topic in the market was a report--later denied--that the House Ways and Means subcommittee was considering imposing a withholding tax on interest received by foreign investors on U.S. government bonds they own.
If enacted, such a tax could conceivably hurt foreign demand for U.S. bonds.
While the 30-year T-bond was hit hardest Thursday, shorter-term yields also rose. The yield on one-year Treasury bills jumped to 3.36% from 3.30% on Wednesday.
Still, many analysts said they doubted that Thursday’s reversal marks the beginning of a surge in interest rates.
“This is a correction, but all of the fundamental components that made up the (recent) rally--moderate economic growth, low inflation and the (Clinton) tax package--are not disappearing. This is not a rally buster,” said Dana Johnson, head of market analysis at First National Bank of Chicago.
“I don’t think this means the end” to the rally, added Kevin Flanagan, economist at Dean Witter Reynolds in New York. “We’ve had such a sharp run-up lately (in bond values), it was viewed as a time to take profits.”
Stocks
Wall Street showed surprising stamina, bouncing back from two days of selling, despite the jump in interest rates.
The Dow industrials rose just 0.56 of a point to 3,589.49, but broader indexes looked better. The Standard & Poor’s 500 index gained 0.85 of a point to finish 457.50.
On the New York Stock Exchange, rising stocks topped losers 11 to 9 on moderate volume.
In the NASDAQ market of mostly smaller stocks, the rebound was stronger: The composite index jumped 6.98 points to 737.71, after falling 19 points the previous two days.
“Considering the bonds took a pretty hard selloff, the stock market behaved better than you might have expected,” said Bruce Bittles, market strategist at J.C. Bradford.
Buoyed by Thursday’s encouraging economic news, analysts said some investors may be focusing more on corporate profit potential in a stronger economy than on the turnaround in interest rates.
Also, Germany’s decision to cut interest rates Thursday may have helped sentiment, traders said. An economic recovery in Europe would help many U.S. exporters.
Among the market highlights:
* Many industrial stocks advanced on the economic reports. GM gained 1 1/4 to 46, Caterpillar jumped 1 1/8 to 80 1/4, Ford leaped 1 3/8 to 52 7/8, Cummins Engine added 1 1/8 to 82 and Cincinnati Milacron was up 7/8 to 23 3/4.
* Technology stocks also rocketed after two days of heavy selling. Intel surged 1 3/4 to 64 3/4, Compaq jumped 2 3/8 to 56 1/2, Motorola gained 1 7/8 to 93 3/4, Lotus rose 1 3/4 to 35 3/4 and Newbridge Networks soared 4 1/8 to 66 1/8.
* Financial stocks rose despite the rise in interest rates. In the case of bank stocks, investors may be weighing the opportunity for faster loan growth in a healthier economy, some traders said.
Citicorp shot up 1 3/4 to 35 3/8, Nationsbank jumped 1 to 52 5/8, First Interstate zoomed 2 1/8 to 64 3/8 and Mellon soared 2 1/4 to 59 1/8.
Among brokerages, Merrill Lynch gained 2 to 97, Morgan Stanley zoomed 3 1/8 to 84 3/8 and Schwab was up 1 to 32 1/4.
* In the health care sector, Warner-Lambert jumped 1 7/8 to 69 1/8 after the government approved the firm’s drug Cognex for treatment of Alzheimer’s disease. Also, Glaxo surged 1 3/8 to 19 1/2 after the British drug company said its fiscal 1993 pretax profit jumped 17%.
Overseas, Frankfurt’s DAX index eased 4.48 points to 1,880.81 despite the German rate cut. In London, the FTSE-100 index slipped 4.2 points to 3,031.2.
In Tokyo, the Nikkei index lost 92.61 points to finish 20,825.58.
Other Markets
Gold prices continued to recover from Tuesday’s big drop. On the New York Commodity Exchange, gold for current delivery closed at $354.20 an ounce, up $3. Silver added 2.2 cents to end at $4.24.
But oil prices finished below $17, at their lowest level since Iraq’s invasion of Kuwait in July, 1990. On the New York Merc, light, sweet crude for October fell 6 cents to $16.97 a barrel.
Elsewhere, the dollar sank even though Germany cut interest rates, which should have weakened the German mark. The dollar closed at 1.60 marks in New York, down from 1.613 on Wednesday, and at 105.43 yen, down from 105.60.
Market Roundup, D8
