Dow Erases Most of Gains in 19.98 Fall

Market Overview

* Stock prices fell Wednesday, giving back most of Tuesday’s gains, after investors decided that they were concerned about inflation and interest rates after all.

* Investors afraid that another interest rate hike is imminent avoided the Treasury’s auction of new two-year notes, sending long-term bond yields soaring.

Stocks

The market was also pushed lower by the rise in bond yields.

The Dow Jones industrial average closed down 19.98 at 3,891.68, losing most of Tuesday’s 24-point gain, while in the broader market, declining issues narrowly outnumbered advancing ones.

Broad-market indexes were also lower. The Nasdaq composite index of mostly smaller stocks fell a modest 2.04 to 789.11.

Big Board volume was a robust 309.91 million shares, compared to 270.90 on Tuesday.

On Tuesday, the blue-chip average surged after congressional testimony by Federal Reserve Board Chairman Alan Greenspan allayed investors’ fears that inflation would prompt the Fed to raise interest rates.

Greenspan said that while the Fed is likely to tighten credit, the timing of rate increases was not certain and “overall price pressures appear to remain damped.”

On Wednesday, however, traders took the view that inflation is at the door and that it is likely to cause long-term problems for stock prices.

“There is still the lingering fear that inflation is a bigger problem than Greenspan says it is,” said John H. Shaughnessy, research director at Advest Inc.

Among the market highlights:

* There were some big losers among economically sensitive stocks in the Dow 30, including Alcoa, which fell 1 to 76; Goodyear, down 1 1/4 to 45; Minnesota Mining & Manufacturing, down 7/8 to 106 7/8, and United Technologies, off 1 1/4 at 67 1/2.

* Hewlett-Packard gained 1 5/8 to 91 3/4 after the firm’s 15% investment in Taligent received final regulatory approval.

* First Interstate Bancorp soared 2 7/8 to 69 3/4 after pulling out of a Montgomery Securities conference, sparking speculation that it is holding merger or acquisition talks with another company.

* Technology stocks turned mixed in the afternoon. Tele-Communications Class A stock fell 5/8 to 24 1/4. But Dell Computer was up 1 3/8 at 24 1/8, and Lotus Development was up 1 3/4 at 70 after saying it expects to add about 600,000 new Lotus Notes users this year.

Overseas markets were mixed. Tokyo’s key Nikkei average ended at 19,341.83, off a mere 0.80 point. In Frankfurt, the 30-share DAX average was up 20.05 points at 2,127.67, and London’s Financial Times 100-share average closed 8.2 points higher at 3,341.9.

Mexico City’s Bolsa index dropped 62.70 points to 2,572.35 on heavy selling by foreign investors.

Credit

The Treasury’s main 30-year bond yield jumped to 6.65% from 6.60% the day before, pushing prices down 5/8 point, or $6.25 per $1,000 in face value. Yields and prices move in opposite directions.

Shorter-term maturities fell even more sharply.

It was the government’s first sale of fresh two-year notes since the Fed pushed up short-term interest rates for the first time in five years on Feb. 4.

As such, it was closely watched by market participants for further evidence of the bearishness that followed the Fed’s action. They were not disappointed.

The Treasury sold $17 billion of new two-year Treasury notes at a high yield of 4.66%, up from 4.11% at the last auction Jan. 25 and the highest level in 14 months.

Other Markets

The dollar finished higher against most foreign currencies after spending most of the day trading in a narrow range influenced mainly by technical factors.

In New York, the dollar ended at 105.55 Japanese yen, down from 105.60 on Tuesday.

Platinum futures prices steepened their slide from a six-month high as traders turned to prospects for Russian sales of the metal.

Platinum for April delivery fell $5.90 on the New York Merc to $391.20 an ounce.

On the New York Comex, gold closed at $377.70 an ounce, off 30 cents, while silver closed at $5.229 an ounce, up 1.6 cents.