FINANCIAL MARKETS : Reports of New Confidence Put Yields on Rise
Market Overview
Treasury bond yields rose sharply on news that consumer and business confidence in the economy increased sharply in November.
Blue-chip stocks closed higher despite the sharp rise in interest rates.
Bonds
The Treasury market was depressed from the outset as investors reacted negatively to an article in The Washington Post suggesting that the nation’s unemployment rate may drop below 6% next year. This could rekindle inflation, which tends to erode the value of Treasury bonds and other investments that pay a fixed rate of interest.
The yield on the Treasury’s 30-year bond rose to 6.30% from 6.23% late money, pushing prices down 29/32 point, or $9.06 per $1,000 in face value. Bond yields and prices moves in the opposite directions.
The article, which quoted an unnamed Clinton Administration official, came three days before the Labor Department’s release of November employment data.
Fixed-income investors, who consider the statistics among the month’s most important economic indicators, are closely watching the report for signs of stronger growth in the fourth quarter, which would fuel inflationary pressures.
Kathleen Camilli, chief economist at Maria Fiorini Ramirez Inc., said the bond market could see a selloff if nonfarm jobs increase by “significantly” more than 200,000.
Those worries were intensified Tuesday after Chicago area purchasing managers said business activity rose significantly in November in that large industrial region, and the Conference Board, a business research group, said its national Consumer Confidence Index rose 11 points this month, a jump rarely seen in the 25-year history of the influential index.
Later, the Johnson Redbook report showed November retail sales up a strong 8.9% from a year ago.
While the Chicago survey is limited to Midwest-based businesses, it is viewed as a harbinger of a nationwide purchasing managers’ survey scheduled for release on Wednesday.
Investors in tax-free municipal securities, meanwhile, braced for a huge $1.3 billion note sale by New Jersey. The deal, expected to come to market Wednesday, is the largest competitively bid debt sale in that state’s history.
The federal funds rate, the interest on overnight loans between banks, was 3.125%, up from 3.063%, unchanged from late Monday.
Stocks
Analysts said a variety of factors influenced stock investors. While some of them sold in response to the retreating bond market, others found bargains in underpriced blue chips and oil and technology issues.
Higher interest rates erode the value of bonds, which pay a fixed rate of return. Higher interest rates can also tempt investors away from stocks because of increasing yields on comparatively safer investments such as money market funds.
The Dow Jones Average gained 6.15 points to close at 3,683.95, while in the broader market, declining issues barely outnumbered advancers on the New York Stock Exchange. Big Board volume was an active 290.25 million shares, against 272.71 million shares in the previous session Monday.
Tuesday’s economic reports separated bond from stock traders.
The reports pushed bond prices down further, but stocks went their own way, see-sawing through the afternoon.
Among the market highlights:
Microchip maker Intel Corp. rose 1 5/8 to 61 1/2. Compaq Computer Corp. gained 1 1/8 to 72 3/8; Hewlett-Packard rose 1 1/8 to 73 3/4.
* Dell Computer gained 3 to 27 1/8. Although the company’s third-quarter earnings report Tuesday showed a 60% drop, it was a better performance than Wall Street had expected.
On Monday, crude oil prices plunged to the lowest levels since 1988, after OPEC failed to cut production. Oil stocks that were hurt by that news on Monday bounced back Tuesday. Among them: Exxon rose 1 to 62 3/4; Chevron added 1 1/4 to 86 7/8; Amoco gained 1 to 53 3/8.
* Western Publishing Group leaped 5 1/2 to 18 after it said late Monday it had been approached by companies seeking to merge.
* Babbage’s, which sells software for home computers, tumbled 4 1/2 to 21 3/4 after it reported a decline in store sales in November.
* Elcor Corp., which makes roofing and industrial products, tumbled 3 7/8 to 18 3/4 after it said results for its current fiscal year would fall short of the previous year’s.
In overseas trading, London’s Financial Times 100-share average ended with gains across the board. The average closed 31.1 points higher at 3,166.9. In Frankfurt, the 30-share DAX average closed up 14.34 points, at 2,057.77.
Mexico’s bolsa index declined 27.44 points, or 1.22%, to close at 2215.69.
Other Markets
The dollar rose against most currencies, lifted by stronger-than-expected reports on U.S. consumer confidence and economic strength.
Signs of strength in the U.S. economy tend to push the dollar higher, since investors are more attracted to U.S. business and anticipate higher U.S. interest rates when the economy is strong.
Despite the positive numbers, however, the dollar failed to break above 1.720 German marks. Traders said the dollar ran out of steam because traders were busy closing their books for November. The dollar closed in New York at 1.715 marks, up from 1.709 marks late Monday.
The greenback finished at Japanese 109.05 yen, down from 109.20 yen on Monday.
Elsewhere, in other markets:
* Gold prices recovered slightly after plunging Monday along with oil and other commodities. On the New York Comex, gold closed at $369.80 an ounce, up 40 cents from Monday. Silver closed at $4.420 an ounce, off 2.5 cents.
* Crude oil futures stabilized after sharp declines the day before at the New York Merc. Light, sweet crude oil was 12 cents higher at $15.43 a barrel.
Market Roundup, D6
