Interest Rate Fears Jolt Stocks, Bonds
Market Overview
* Short-term interest rates surged Thursday amid speculation that the Federal Reserve Board may already be tightening credit. Long-term rates rose less sharply.
* The stock market tumbled in early trading but rallied near the close to finish modestly lower, despite the rate jump.
* Key commodity prices rose strongly.
Credit
With a regular meeting of the Fed’s policy-making Open Market Committee as a backdrop, short-term interest rates rocketed.
The yield on three-month Treasury bills soared to 3.22% from 3.13% on Wednesday, and six-month T-bill yields rose to 3.36% from 3.30%.
The Fed’s failure to add liquidity to the banking system early Thursday, as short-term rates rose, convinced many bond traders that the central bank was already in the process of tightening credit for the first time since 1989.
Fed Chairman Alan Greenspan had warned as recently as Monday that the Fed could be forced to boost short-term rates somewhat to keep the fast-growing economy from overheating.
When the key federal funds rate--the annualized rate banks charge each other for overnight loans--rose as high as 3.5% on Thursday morning, the Fed’s failure to intervene was seen as a sign it wants to push the rate a quarter-point above the current target of 3%. Fed funds closed at 3.13%.
Long-term interest rates, however, didn’t rise as much as short rates. The 30-year T-bond yield finished at 6.31%, up from 6.28%.
Another key test for rates will come today, when the government reports on January employment.
Stocks
Stocks got off to a weak start and remained depressed all morning and into the early afternoon as interest rates rose.
But the profit taking subsided later, and prices rallied back.
The Dow Jones industrials, down 26 points at midday, closed down 7.88 points at 3,967.66.
In the broader market, losers beat winners by about 4 to 3 on the New York Stock Exchange and by a thinner margin on Nasdaq.
Ricky Harrington, analyst at brokerage Interstate/Johnson Lane, linked the market’s afternoon improvement to reports of strong January car sales.
Even if interest rates rise a bit, stock investors are unlikely to lose interest in the market as long as the economy stays healthy, many analysts say.
Among Thursday’s highlights:
* Auto stocks jumped on the January sales news. GM gained 1 1/2 to 63, Ford rose 1 5/8 to 69 3/8 and Chrysler added 1 1/4 to 62 1/2.
* Many other industrial issues also continued to rally on optimism about the economy. Nucor gained 1/2 to 59 5/8, Varity jumped 1 1/8 to 44 3/8, Phelps Dodge rose 1/2 to 56 1/2, GE gained 5/8 to 109 3/4 and Caterpillar advanced 3/4 to 105 3/8.
* On the downside, Woolworth fell 1 1/4 to 24 5/8 after reporting that its January same-store sales rose just 2.2%. The company also said its fiscal fourth-quarter earnings will be well below year-ago levels.
Among other retailers reporting sales, Wal-Mart inched up 3/8 to 28 1/8, Ann Taylor surged 2 to 23 1/2 and Dayton Hudson added 7/8 to 67 3/8. Dillard lost 1 1/8 to 35 1/4 and Nordstrom eased 1/2 to 34 1/4.
* Financial stocks were broadly lower as interest rates rose. J.P. Morgan fell 1 to 70 7/8, Federal Home Loan Mortgage dropped 1 3/8 to 57 5/8, Citicorp lost 1 to 42 1/2 and NationsBank slid 5/8 to 49 7/8.
But Countrywide Credit gained 1/2 to 27 5/8. The company said it funded 61% more in mortgages in January than a year earlier.
* Computer chip giant Intel sank 2 to 63 1/4. Cowen & Co. downgraded Intel to “buy” from “strong buy,” citing uncertainties stemming from recent legal setbacks.
Overseas, Frankfurt set a negative tone as stocks dove after the Bundesbank decided against a new interest rate cut. The DAX index lost 32.29 points to 2,151.72. London’s FTSE-100 fell 28.8 points to 3,491.5. In Tokyo, the Nikkei index eased 75.21 points to 20,174.82.
In Mexico City, the Bolsa index soared to a record 2,822.51, up 37.61 points, awaiting Telmex’s earnings report. After the market closed, Telmex said 1993 operating earnings rose 5.9% on a 10% sales gain.
In other markets:
* Gold rebounded, rising $2.60 to $387.30 an ounce on the Comex, following a steep rally in silver. Silver shot up 13 cents to $5.47.
* Among other commodities, sugar prices hit seven-month highs, while coffee prices jumped on export news from Brazil. However, energy prices were broadly lower after a three-day rally.
Market Roundup, D6
