FINANCIAL MARKETS : Tepid Demand Chills Bond Rally

Market Overview

* A lackluster Treasury auction of three-year notes cooled an enthusiastic bond market rally Tuesday, suggesting that investors remain nervous after the weeklong price plunge that ended Monday.

* Stocks closed mixed after the market made an initial surge keyed on a better-than-expected inflation report and a rally in the bond market.

Credit

The government’s main 30-year bond yield plunged in early trading after the government reported an unexpected decline in October wholesale prices, an indication that inflation is under control.

But by day’s end, the bond’s yield recovered somewhat, closing at 6.14% from Monday’s 6.30%. Its price, which moves in the opposite direction, soared 1 1/8 points in early trading, but its gain was trimmed at the close to 5/8 point, or $6.25 per $1,000 in face value.

Shorter-term Treasury securities ended mixed. Prices of short-term notes were 1/32 point lower to unchanged, and intermediate notes were up between 1/16 point and 1/8 point, the Telerate Inc. financial information service reported.

Analysts said the market’s reluctance to maintain price gains indicated that investors were still bearish after the stunning selloff that began late last month.

Some of that caution was initially forgotten in early trading when the Labor Department reported that prices paid to producers declined 0.2% in October. Most economists had predicted a 0.2% rise.

The news assuaged fears that inflation is rising, a condition that tends to reduce the value of long-term securities that pay a fixed rate of return.

But the market’s early gains faded after the government announced results of its afternoon sale of $17 billion in three-year notes, part of the Treasury’s quarterly refunding.

Underscoring the mediocre demand, the bid-to-cover ratio--a measure of auction demand that compares the number of bids offered to those accepted--was only 1.97-to-1, down from an average of 2.45-to-1 over the previous 10 auctions of three-year maturities.

The federal funds rate, the interest on overnight loans between banks, was 2.938%, down from 3.063% late Monday.

Stocks

The Dow Jones industrial average, which gained about 20 points in the opening minutes of trading, lost those gains as the day wore on, closing down 7.83 points to 3,640.07.

In the broader market, advancing issues outnumbered declines by about 4 to 3 on New York Stock Exchange volume of 276.36 million shares.

Stock prices initially rallied early in the session after the Labor Department released its producer price index report.

That led to the bond market’s early rally. Stocks have often followed bonds recently because low interest rates make shares more appealing to investors.

There was no specific reason to account for the Dow’s decline, which began at midday, said Don R. Hays, head of investment strategy at Wheat, First Securities Inc. in Richmond, Va.

Among the market highlights:

* Lower interest rates helped bank and brokerage stocks, with First Interstate Bancorp up 1 1/4 at 57 5/8; Bankers Trust rose 1 at 76 1/4; American Express, up 1 1/4 at 31 7/8.

* RJR Nabisco was leading the NYSE most-active list, up 3/8 at 6 3/4 after the company said it would raise cigarette prices. Philip Morris was up 1 at 55 3/4.

* Wal-Mart rose 3/8 at 28 5/8, the second most-active issue on the NYSE, after it reported third-quarter earnings of 23 cents a share, up from 19 cents in the third quarter 1992.

* In Nasdaq trading, Boston Chicken, a new issue, led the active list, unchanged at 48 1/2 on volume of 8.4 million shares.

* Newbridge Networks was up 3/8 at 60 3/8 after saying its Vivid business unit and Standard Microsystems Corp. have formed a strategic alliance to jointly develop and market products.

Other Markets

* The dollar rose against most currencies. It finished in New York at 107.90 Japanese yen and 1.692 German marks, up from Monday’s 107.85 yen and 1.6855 marks respectively.

* Gold rose $1.20 to $376.00 an ounce on the New York Comex.

* Light, sweet crude oil for December delivery fell 5 cents to $16.66 a barrel on the New York Merc.

Market Roundup, D8