Bond Yields Drop; Dow Declines 1.68

Market Overview * Long-term bond market yields plummeted Wednesday, pushing prices sharply higher, after the government reported producer prices remained in check last month--a sign that inflation is under control.

* Stock prices ended mixed, encouraged by falling interest rates but held down in part by tumbling share prices in Europe.

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The Treasury’s main 30-year bond yield fell to 6.175% from Tuesday’s closing of 6.23%, boosting its price 25/32 point, or $7.81 per $1,000 in face value. Prices and yields move in opposite directions.

The heavy rally began after the Labor Department reported that its producer price index, which measures inflationary pressures before they reach the consumer, fell 0.1%. For the year, the index rose a slight 0.2%. It was the best performance in two years.

This was good news to the bond market, since inflation erodes the value of fixed-income securities. But the enormity of the market’s reaction--the 30-year issue was up more than a point at midday--puzzled some economists.

“It sure seemed like the (producer price index) report was in line with market expectations,” said Mark Green, an economist at Wells Fargo & Co. in San Francisco.

Added economist Robert Brusca: “There was some bad news in this report that was completely shrugged off by the market.”

Brusca, chief economist at Nikko Securities International Inc., said the producer price report, excluding its volatile energy component, rose 0.5% in each of the last two months. The December report shows that a sharp drop in gasoline prices more than offset a rise in the price of food.

Stocks

Stocks started Wednesday solidly higher with good news on inflation and a strong bond market, tumbled at about the time European stocks closed at their lows for the day, then recovered late in the session.

On Wall Street, the Dow closed down 1.68 points, at 3,848.63, on Big Board volume totaling 310.69 million shares. Advancing issues outnumbered declining ones about 6 to 5 on the New York Stock Exchange. It was the seventh straight session in which more than 300 million shares were traded.

The drop in bond rates helped stocks. Lower rates usually encourage stock investors because they make share prices more appealing and cut the cost of borrowing for companies. Still, stocks spent much of Wednesday lower.

Peter Canelo, chief investment strategist at NatWest Securities Corp., said the fall in stock prices coincided with the European markets closing.

“There was a sympathetic response to selling overseas,” Canelo said.

Although in Tokyo, the Nikkei average closed up 308.63 points at 18,793.88, London’s Financial Times 100-share average fell 41.8, or 1.22%, to 3,372.0. Frankfurt’s 30-share DAX average closed down 19.57 points at 2,209.18. Stocks also closed sharply lower in Paris.

Elsewhere in foreign trading, Mexico City’s Bolsa index rose 10.77 points to 2,565.33 after President Carlos Salinas de Gortari announced he had ordered army troops to cease firing in the uprising in Chiapas state, analysts said.

Hong Kong’s Hang Seng index tumbled 443.08 points to close at 10,712.73.

Among the market highlights:

* Technology stocks rallied after a trade group reported strong demand for semiconductors in December. First Boston also upgraded 15 semiconductor stocks, to “buy” from “hold.” Among the winners were Intel, up 1 5/8 to 68 3/8, Motorola; ahead 2 1/2 to 94 3/4; Texas Instruments, up 3 1/4 to 70 1/4, and National Semiconductor, up 3/4 to 18 3/4.

* Meanwhile, oil company stocks were depressed by the latest drop in crude oil prices. Chevron fell 7/8 to 89 7/8; Texaco was off 3/8 to 65 3/4.

* Merry-Go-Round fell 7/8 to 1 3/4. The apparel company said Monday it filed a voluntary petition for protection and reorganization under Chapter 11.

* American Express fell 1/8 to 30 5/8 after it unveiled the American Express Corporate Purchasing Card.

Other Markets

The dollar fell against most other currencies, caught in cross-trading between the German mark and a surging British pound, traders said.

Elsewhere, gold closed on the New York Comex at $386.30 an ounce, off $1.70 from Tuesday; silver closed at $5.075 an ounce, down 3.4 cents.

Profit taking in heating oil triggered a sharp drop in crude oil futures on the New York Merc. Light, sweet crude for February delivery fell 52 cents to $14.33 a barrel.

Market Roundup, D6