Bond Yields Soar Again, Stocks Fall

Market Overview

* Fresh worries about higher inflation Tuesday sent Treasury bond yields soaring to levels last seen in June. Short-term yields also surged, on the assumption that the Federal Reserve Board will tighten credit again soon.

* Stocks were hit by rising interest rates, but prices regained some ground late in the day.

Credit

The Treasury’s 30-year bond yield rocketed to an eight-month high of 6.78% from 6.65% on Monday, after two economic reports proved too much for jittery investors to handle.

First was a report by the nation’s purchasing executives that showed an unexpected surge in materials prices last month to the highest level since October, 1990.

Second, the government said it revised its estimate of the economy’s fourth-quarter growth rate to 7.5%--well above expectations.

Bond yields have been rising sharply since the Fed boosted short-term rates by a quarter point on Feb. 4, causing a chain reaction of bond selling by high-powered speculators and other players.

Meanwhile, traditional investors have been unwilling to bid for bonds despite higher yields, because of fears that inflation will accelerate with the economy.

But many economists point out that although prices of some commodities are rising, those costs are relatively minor in the scheme of things. Labor accounts for two-thirds of manufacturers’ production costs, and there appears to be no real wage pressure in the economy, with unemployment high.

“The underlying rate of inflation is determined in the labor markets,” said economist Edward Yardeni at C.J. Lawrence Inc.

Nonetheless, bond traders remain suspicious about inflation’s trend, allowing bond prices to free-fall and yields to surge.

Also, there is widespread belief that the Fed will boost short-term rates again soon in at attempt to show that it is serious about keeping the economy’s growth rate, and inflation, moderate.

On Tuesday, the yield on six-month T-bills soared to 3.85% from 3.70% on Monday, reflecting expectations of a Fed tightening.

Other Markets

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

The Dow Jones industrials, off more than 40 points at midday, closed down 22.79 points at 3,809.23. Declining issues outnumbered advances by about 2 to 1 on the New York Stock Exchange.

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

As stocks followed bonds, they ignored one bright piece of news: S&P; reported that 226 companies raised cash dividends to shareholders in February, up from 185 in January and the best monthly total since February, 1981.

Companies’ willingness to boost dividends is usually a sign of their confidence in rising profits.

Among Tuesday’st highlights:

* Interest-sensitive stocks tumbled. Citicorp fell 1 1/8 to 40 3/8, Travelers dropped 1 1/2 to 35 5/8 and home builder Centex slumped 1 3/4 to 35 1/2.

* Among blue chips, Alcoa shrank 3/4 to 74 1/2, Goodyear dropped 1 1/4 to 44 and International Paper slid 1 to 71 5/8.

* 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.

Overseas, Frankfurt’s DAX index dropped 24.52 points to 2,067.05, while London’s FTSE-100 sank 57.5 points to 3,270.6.

In Mexico City, the Bolsa index tumbled with Wall Street, losing 71.29 points to 2,514.15.

Tokyo shares gained. The Nikkei added 219.42 points to 20,216.62.

In other markets:

* Gold lost ground on the New York Comex, falling $3.10 to $378.30 an ounce. Silver fell 8.3 cents to $5.27.

* The dollar rose slightly on news of stronger-than-expected economic growth.