Yield Climbs 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 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 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.
At the close, the Treasury’s key 30-year bond yield spurted to 6.54%, the highest level seen since early August. On Wednesday, the bond closed at 6.46%. Its price, which moves in the opposite direction, closed down 1 1/32 points, or $10.31 per $1,000 in face value, after initially rising 3/4 point.
In short-term securities, the 5% five-year note was ending 14/32 off, at 98 2/32, to yield 5.44%, while the 4% two-year note was ending off 4/32 at 99 3/32, to yield 4.48%.
Bond prices advanced earlier, after the Labor Department reported no change in the consumer price index in January--the first month in which costs failed to rise in more than four years.
But bond prices began tumbling after the Federal Reserve Bank of Philadelphia issued its regional manufacturing survey, showing what many took to be signs of impending inflation.
Analysts said they were generally surprised by the strength of the market selloff, particularly following a consumer inflation report that ordinarily would have given the market a strong lift.
“I could understand the first couple of hours of today’s trade, the uptick of 3/4 point,”’ said Joseph Liro, chief economist at S.G. Warburg & Co. “But the move down has me befuddled.”
Stocks
The stock market was shaken by the Philadelphia Fed’s report.
The Dow Jones industrial average veered within a 50-point range. After working its way through the wobbly session, the blue-chip indicator closed 14.63 off at 3,922.64.
On the Big Board, losers outnumbered gainers by about 7 to 5 in the late count on the New York Stock Exchange, where trading was active. Big Board volume came to 338.89 million shares, up from 295.42 million the day before.
An initial burst of stock buying in the morning subsided when the bond market abruptly reversed course and lost ground. Computer-guided program selling intensified the decline in stocks.
Among the market highlights:
* Valassis Communications surged 5 3/4 to 17 1/2 in unusually heavy trading. A competitor of Valassis is getting out of the free-standing inserts business.
* Among groups hit by profit taking were cyclical and telecommunications stocks. General Motors fell 1 to 60, Alcoa dropped 7/8 to 78 3/4, AT&T; dropped 3/8 to 54 1/4 and Bell Atlantic shed 1 1/4 to 53 1/8.
* Interest-sensitive financial stocks were also weak, with insurer American International Group down 1 to 88 7/8 and Federal National Mortgage Assn. off 1 3/4 to 85.
* 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 ended up 3/8 to 41.
* Boeing rose up 1 1/4 to 47 3/4. The jet manufacturer will get a substantial amount of new business due to Saudi Arabia’s $6-billion order for commercial aircraft from Boeing and McDonnell Douglas, which rose 1 1/8 to 120.
* International Game Technology added 1 1/8 to 28 1/4 after Smith Barney raised the firm’s investment rating to “buy” from “outperform.”
* Hewlett-Packard gained 5/8 to 89 3/4 after its investment rating was raised to “outperform” from “neutral” by Smith Barney.
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 closed 7.89 points down at 2,128.72. London’s Financial Times 100-share average gained 7.6 points to 3,425.3.
In Mexico City, the Bolsa index fell 4.71 points to 2,775.52 in a light session marked by Telefonos de Mexico losses on Wall Street.
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
