Bond Yields Soar as Dow Drops 22.79

Market Overview

* Fresh signs of higher inflation Tuesday sent Treasury bond yields soaring to eight-month highs, pushing prices sharply lower.

* The stock market took its cue from the bond market and fell broadly.

Credit

To bond investors already jittery over inflation, a report by the nation’s purchasing executives prompted wide speculation that the Federal Reserve Board could move as early as Friday to raise interest rates again to check price pressures.

The news sent 30-year bond yields surging to 6.78% from 6.65% on Monday and the price, which moves in the opposite direction, down 1 15/32 points, or $14.69 per $1,000 in face value.

It was the highest bond yield since it closed at 6.78% on June 21.

Shorter-term yields posted even sharper gains on expectations of another tightening by the Fed, which raised rates on Feb. 4 for the first time in five years.

The National Assn. of Purchasing Management reported an unexpected surge in prices last month to the highest level since October, 1990.

Higher inflation and interest rates tend to reduce the value of bonds, which pay a fixed rate of return.

The purchasing managers survey was particularly worrisome to fixed-income investors because the Fed has said that such economic indicators now figure more importantly in its interest rate decisions.

Another report arousing inflation worries was the Commerce Department’s upward revision of gross domestic product to 7.5% in the fourth quarter of last year from the previous estimate of 5.9%.

Some market participants speculated that the Fed may move again Friday if the Labor Department’s monthly employment report shows an unexpected rise in the nation’s payrolls.

Other Markets

Stocks spent the day solidly lower, although they recovered from their worst levels toward the day’s end.

The Dow Jones industrial average lost 22.79 to 3,809.23 on Big Board volume totaling 300 million shares. In the broader market, declining issues outnumbered advances by about 2 to 1 on the New York Stock Exchange.

Among other major market indicators, the Standard & Poor’s index of 500 stocks fell 2.70 to 464.44, while the NYSE’s composite index fell 1.42 to 257.81. The Nasdaq composite index of mostly smaller stocks lost 3.86 to 788.64.

Among the market highlights:

Financial stocks tumbled in response to the higher rates, with American Express losing 3/8 to 28 7/8 and Travelers falling 1 1/2 to 35 5/8, both in active trading.

* Technology stocks were also hit hard, with AST Research falling 2 3/4 to 28 3/4, Hewlett-Packard slipping 3/4 to 89 7/8 and Intel Corp. off 2 to 66 3/4. Bucking the trend was Digital Equipment, which was upgraded to “buy” from “hold” by Salomon Bros. and rose 2 1/8 to 31 1/4.

* Among blue chip cyclical stocks, Alcoa shrank 3/4 to 74 1/2, Goodyear Tire dropped 1 1/4 to 44, DuPont fell 3/4 to 52 1/2 and International Paper dropped 1 to 71 5/8.

* ShowBiz Pizza Time shrank 1 1/2 to 13 1/2 after it reported a fourth-quarter loss.

* Snapple fell 1 3/4 to 27 1/8 after Coca-Cola said it will compete in the fruit drink market.

Stocks ended mostly lower abroad. Tokyo’s Nikkei 225-share average average closed up 219.42 at 20,216.62. In Frankfurt, the 30-share DAX average dropped 24.52 points to 2,067.05, while London’s Financial Times 100-share average fell 57.5 points to end at 3,270.6. Mexico City’s Bolsa index, tumbled 71.29 points to close at 2,514.15.

Meanwhile, precious metals prices fell on the New York Comex, with gold for current delivery closing at $378.30 an ounce, down $3.10 from Monday. Silver fell 8.3 cents to $5.273 an ounce.

Elsewhere, the dollar closed higher against most major European currencies after the government reported that the economy grew much faster than expected in the last quarter of 1993.