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 rise in yields that ended Monday.

* U.S. stocks closed mixed after an initial surge fueled by a lower than expected inflation report and by the firmer bond market.

In Tokyo, stocks plunged anew after a gloomy economic report.

Credit

News that wholesale prices sank 0.2% in October helped pull bond yields sharply lower early in the day, as investors expressed relief that the growing economy hasn’t fueled inflation.

The 30-year Treasury bond yield plunged to 6.11% in early trading, from Monday’s 6.20%. But by day’s end, the bond’s yield began to inch back up, and it closed at 6.14%.

Meanwhile, short-term yields rose despite the inflation news. The three-month T-bill yield closed at 3.18%, versus 3.13% on Monday.

Dampening sentiment late in the day was weak bidding at the Treasury’s sale of $17 billion in three-year notes, part of the government’s quarterly refinancing.

The average yield on those notes was 4.44%, higher than expected. Underscoring the mediocre demand, the bid-to-cover ratio--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 notes.

After the sharp rise in bond yields last week on strong economic reports, “people are still a little timid,” said Peter McTeague, strategist at Technical Data in Boston, reflecting on the bond rally’s inability to hold up Tuesday.

The bond market faces another test today, when the government reports consumer price inflation in October. Also, the Treasury will auction new 10-year notes today.

Other Markets

The wholesale inflation report cheered Wall Street, but bonds’ late weakness hurt stocks.

The Dow industrials, up about 20 points in the opening minutes of trading, lost those gains as the day wore on, and closed down 7.83 points to 3,640.07.

The broad market was stronger than the Dow suggested, however. Winners outnumbered losers by 12 to 9 on the New York Stock Exchange, and most key indexes closed modestly higher.

The Nasdaq composite index of mostly smaller stocks rose 3.63 points to 769.84, after adding 3.22 points Monday.

Alan Ackerman, market strategist at Reich & Co., said that despite the “shot of adrenaline” from the wholesale inflation report, the market was still searching for direction after last week’s selloff tied to higher interest rates.

U.S. market sentiment wasn’t helped by news from Tokyo, where the Nikkei index plummeted 499.45 points to 18,125.71 after the Japanese government said the country’s economy shows no signs of recovering anytime soon.

Early today, the Nikkei was off 99.31 points to 18,026.40.

In other foreign markets, London’s FTSE-100 index rose 18.4 points to 3,096.0, and Frankfurt’s DAX index gained 12.02 points to 2,022.83.

Among U.S. market highlights:

* Many retail stocks were higher on reports of strong early-November sales. Nordstrom rose 3/4 to 34 3/4, J.C. Penney gained 1 1/8 to 51 3/8, TJX added 1 to 32 3/4 and Dayton Hudson was up 3/8 to 71. Also, Wal-Mart gained 3/8 to 28 5/8 after reporting third-quarter earnings were up 21%.

* Heavy-construction stocks were boosted by positive comments from Smith Barney Shearson. Fluor jumped 2 to 41 3/8, Jacobs Engineering gained 1 3/8 to 24 5/8 and CBI Industries rose 1 1/4 to 29 1/2.

* Interest rate-sensitive stocks were mixed. Utility stocks continued to fall, as the Dow utility index slumped 2.04 points to 225.09. But some bank stocks rose. First Interstate gained 1 1/4 to 57 5/8, Wells Fargo added 2 1/8 to 112 3/4 and BancOne leaped 1 3/8 to 37 1/8.

* Tobacco stocks jumped on word of new cigarette price hikes. RJR Nabisco added 3/8 to 6 3/4 and Philip Morris jumped 1 to 55 3/4.

* Among new stock issues, Naperville, Ill.-based restaurant chain Boston Chicken rocketed to close at 48 1/2 on Nasdaq after going public at 20. The chain sells rotisserie-cooked chicken, a currently popular food product.

In other markets:

* Gold futures added $1.20 to $376.00 an ounce on the New York Comex, despite the inflation report.

* The dollar rose to 107.90 Japanese yen and 1.692 German marks in New York, up from Monday’s 107.85 yen and 1.685 marks.

Market Roundup, D12