T-Bond Yields Fall With Drop in Oil Prices
* Yields on U.S. Treasury bonds fell for the second consecutive session as the lowest oil prices in five years reinforced expectations that inflation will stay subdued.
* Stock prices also gained amid the perception that the economy is gaining strength without generating a rising inflation rate.
Credit/Energy
The yield on the Treasury’s benchmark 30-year bond plunged to 6.16%, down from 6.23% on Friday and its lowest level in three weeks. The bond’s price, which moves inversely with yield, rose 1 point, or $10 per $1,000 in face value.
Contributing to the market’s two-day rally was a continued decline in petroleum prices, which has also eased fears of higher inflation, according to Elliott Platt, director of economic research at Donaldson, Lufkin & Jenrette Securities Corp.
Light, sweet crude oil for January delivery tumbled 40 cents on the New York Mercantile Exchange to $14.57 a barrel, the lowest settlement for near-term deliveries since Nov. 23, 1988.
The oil price downturn was sparked in part by speculation that Iraq might soon flood the market with more than 3 million barrels of oil daily.
January crude has fallen $1.81, or about 11%, since the Organization of Petroleum Exporting Countries decided Nov. 24 against lowering production to shore up prices.
“The market has no confidence in OPEC taking some action. The market sees nothing on the horizon that’s going to turn it around,” said Bob Baker, energy analyst with Prudential Securities Inc. in New York.
Abundant supplies and slack demand have weighed on crude prices for several months. Unusually mild fall temperatures have limited demand for heating oil, putting further pressure on prices.
Analyst Platt said the drop in inflation fears had led many investors to develop more confidence ahead of the release of producer and consumer price statistics for November, due out Thursday and Friday, respectively.
Analysts also tied the bond rally to continued buying in reaction to Friday’s employment report. However, volume was described as thin, with few trades having a disproportionate influence on the market.
Yields on three-month Treasury bills fell to 3.16% as the discount fell .10% to 3.10%. Six-month yields fell to 3.35% as the discount fell .01% to 3.26%. One-year yields fell to 3.53% as the discount fell .03% to 3.41%.
Yields are the interest bonds pay by maturity, while the discount is the interest at which they are sold.
Stocks
Blue-chip stocks rose, encouraged by falling interest rates, but many smaller company issues ended sharply lower.
The Dow Jones industrial average rose 6.14 to 3,710.21, just shy of its Nov. 16 record closing of 3,710.77.
Advancing issues outnumbered declines by about 7 to 5 on the New York Stock Exchange. Volume on the floor of the Big Board came to 292.01 million shares as of 4 p.m., up from 268.34 million in the previous session.
But the Nasdaq index fell 1.13 to 771.09, pushed lower by a decline in technology issues.
The Dow spent most of the day above its record close, falling back only in the last hour of trading amid concern about a lack of follow-through from other major market indicators, said Rao Chalasani, chief investment strategist at Kemper Securities in Chicago.
Still, stock investors were encouraged by higher bond prices and the accompanying lower interest rates, analysts said. Low rates mean companies spend less to borrow money and make stocks more attractive as an investment.
Lower interest rates, however, did little to shore up smaller capitalization stocks, which started the day sharply lower, before recovering significantly.
A Merrill Lynch analyst cut ratings and earnings estimates for two computer chip issues, Motorola and Intel, apparently citing concerns about personal computer demand. Most technology stocks are concentrated in the Nasdaq market, although Motorola trades on the NYSE.
Intel dropped 4 to 59 1/2, while Motorola lost 2 to 94 1/8. Personal computer and networking stocks were also depressed by the downgrades. Micron Technology lost 1 3/8 at 46 5/8, Texas Instruments fell 2 at 62 1/8 and Advanced Micro Devices lost 3/4 at 17 3/4.
Stocks ended mostly lower abroad. In Tokyo, the 225-issue Nikkei average dropped 3.55% on disappointment about delays in government action to rejuvenate the economy. In London, the Financial Times 100-share index rose 0.1%, while stocks fell 0.1% in Frankfurt and 0.1% in Paris.
In Mexico City, stocks rallied for a fourth consecutive session on a wave of optimism about Mexico’s economic future, traders said. The 36-share IPC index gained 62.05 points, or 2.67%, to a record close of 2,386.14.
Among other stock market highlights:
* Cyclical issues, whose fortunes are closely tied to the economic cycles such as papers, chemicals and heavy equipment, mostly performed well. Those issues were encouraged by last week’s better than expected reports on the economy, including data on unemployment and consumer confidence, Goldman said.
Deere, the maker of farm equipment, rose 1 3/4 to 73 3/4.
* Dreyfus Corp. rose 1 7/8 to 46 3/8 after Mellon Bank said it would buy Dreyfus, one of the nation’s best-known mutual fund companies. Mellon lost 4 3/8 to 53 after the $1.85 billion transaction was announced.
* Seagram dropped 3/4 to 26 3/4 as a large block of 3.3 million shares, representing almost 1% of the outstanding stock in the Canadian beverage concern, was sold Monday by a trust of Charles Bronfman, co-chairman of the company.
* Computer Sciences Corp. closed 1/4 higher at 98 as the El Segundo-based computer services company said its board declared a three-for-one stock split.
Other Markets
The dollar fell against major currencies for a second straight trading day Monday, as investors extended a selloff that began when the dollar ran out of stamina last week despite positive U.S. economic news.
In New York, the dollar finished at 107.90 yen, down from 108.52 on Friday.
Gold prices rose overseas and fell in the United States. On the New York Commodity Exchange, gold for current delivery closed at $375.90 an ounce, off 90 cents.
