Rates Climb on a Hint of Inflation to Come
Market Overview * The bond market brushed off a surprisingly tame January inflation report and zeroed in on a lesser economic indicator, sending long-term bond yields shooting up to 6 1/2-month highs Thursday.
* The stock market seesawed to a lower level as technical forces intensified selling, incited by rising interest rates and lingering wariness about inflation.
Credit
The yield on 30-year Treasury bonds zoomed from Wednesday’s 6.46% to close at 6.54%, the highest level since early August, as traders dumped bonds with a vengeance.
The bond market’s abrupt turnabout reflected a new market psychology colored by the expectation that the Federal Reserve Board is inclined to raise short-term rates at any sign of inflationary pressure, analysts say.
The market initially showed a favorable reaction to Thursday’s government report of a flat consumer price index in January.
But later, traders began to focus on an economic report from the Federal Reserve Bank of Philadelphia. Its regular regional manufacturing survey showed what many took to be signs of impending inflation: None of the manufacturers responding to the survey reported lower supply prices this month, but more than 30% said raw materials prices rose.
That was enough to raise worries that inflation could re-emerge as a problem and prompted widespread selling in the bond market.
However, the damage was in long-term bonds. Shorter-term yields were only marginally higher. The yield on three-month T-bills closed at 3.35%, up from 3.34% on Thursday.
And many bond pros believe that, at worst, the 30-year T-bond yield could hit 6.75% soon. After that, many experts believe rates will fall again by midyear, because economic growth is expected to moderate.
Stocks
The stock market was shaken by the bond market’s slide, but prices climbed back from their worst levels. Off 27 points at midday, the Dow industrials ended down 14.63 points at 3,922.64.
Most broader market indexes also were off marginally, though losers outnumbered gainers by about 7 to 5 on the New York Stock Exchange in active trading.
An initial burst of stock buying in the morning subsided when the bond market abruptly reversed course and lost ground.
Still, the profit taking wasn’t as severe as many analysts expected, given the severity of the bond market’s drop.
Among the market highlights:
* Losses in the Dow were concentrated in International Paper, down 1 to 74 1/2; 3M Co., down 1 1/2 to 108, and Procter & Gamble, down 1 1/4 to 58 1/4.
* Interest-sensitive financial stocks were also weak, with insurer American International Group down 1 to 88 7/8 and Federal National Mortgage off 1 3/4 to 85.
* Among the day’s winners, Boeing rose 1 1/4 to 47 3/4 and McDonnell Douglas added 7/8 to 119 3/4, continuing to rise on news of a major Saudi plane order.
But Raytheon fell 3 1/2 to 62 after the Army said it selected a new Loral missile to upgrade the current Patriot anti-missile system over Raytheon’s multiple-mode missile. Loral rose 3/8 to 41.
* Valassis Communications surged 5 3/4 to 17 1/2. Rival Sullivan Marketing said it will sell its coupon insert business to a competing unit of News Corp., in effect ending a yearlong price war between Valassis and Sullivan, which has resulted in price declines in the newspaper coupon business of more than 20%.
* International Game Technology added 1 1/8 to 28 1/4 after Smith Barney raised the firm’s investment rating to “buy.”
Stocks were mixed in overseas trading. Tokyo’s 225-share Nikkei average ended off 120.72 points at 18,931.39 as arbitrage-linked buying kicked in at the close.
In Frankfurt, the DAX-30 lost 7.89 points to 2,128.72, though after the close the German central bank cut interest rates. London’s FTSE-100 index gained 7.6 points to 3,425.3.
In Mexico City, the Bolsa index fell 4.71 points to 2,775.52.
Elsewhere:
* The dollar edged lower against the German mark despite an interest rate cut by Germany’s central bank. The greenback was mixed against other currencies.
In New York, the U.S. currency closed at 1.722 German marks, down from Wednesday’s 1.723. It rose to 104.17 Japanese yen from 103.80 the day before.
* On the New York Comex, gold closed at $382.80 an ounce, off 80 cents, while silver fell 4.4 cents to $5.230 an ounce.
* Crude oil futures prices rebounded from a two-month low as two OPEC members expressed support for production cuts, but analysts doubted the cartel will act. Light, sweet crude oil for March delivery ended 30 cents higher on the New York Mercantile Exchange at $14.23 a barrel.
Market Roundup, D6
