Interest Rates Surge Again; Stocks Close Modestly Lower

Market Overview

* Long-term bond yields jumped to eight-month highs Tuesday as the bears regained control of the bond market.

* Stocks closed only slightly off despite the latest rate surge. Gold prices inched up even though Japan said it would sell a large quantity of the metal.

Credit

Interest rates rose across the board as investors focused again on the probability of another credit-tightening move by the Federal Reserve Board.

The yield on the Treasury’s 30-year bond soared from 6.79% on Monday to 6.87% on Tuesday, its highest closing since June.

Among shorter-term securities, the yield on one-year T-bills rose to 4.29% from 4.26% on Monday.

After a rally Monday, the bond market slumped back into the worry mode. Traders fear that the Fed is in the midst of an aggressive campaign to boost interest rates, seeking to slow the economy.

The uncertainty as to how high the Fed might raise short rates is driving potential bond buyers out of the market, traders say.

“Investors simply are not doing anything--not necessarily selling or buying,” said Sung Won Sohn, economist at Norwest Corp. in Minneapolis.

“Most of the trading is among the Wall Street professionals. They are passing bonds around and marking prices down along the way,” Sohn said.

Early in the day, the market was buoyed by reports that Fed Gov. Lawrence Lindsey had said Monday that he expected short-term rates to remain around “3 something” this year.

But a Lindsey aide later said the official’s remark was not meant to be taken literally, and that turned sentiment bearish again.

Other Markets

Stock trading action was downbeat as bond yields jumped, but analysts said the market’s continuing resilience was a good sign.

The Dow industrials lost just 4.50 points to 3,851.72, after rising nearly 24 points Monday.

In the broad market, losers topped winners 1,174 to 944 on the New York Stock Exchange. And the Nasdaq composite index, which Monday made a run at its all-time high of 800.47, slipped 2.93 points to 792.12.

“It looks to me like a little bit of a breather after the strength that we’ve seen at the tail end of last week and (Monday),” said Bob Dickey, analyst at Dain Bosworth.

Despite the underpinnings of strong corporate earnings, many analysts say stocks will have trouble running up to new highs if the Fed does raise rates again soon.

Among Tuesday’s highlights:

* Heavy-industry issues, recent market leaders, were mixed. Auto parts maker Varity surged 4 3/8 to 48 7/8 on its earnings report. Other winners included Kennametal, up 1 5/8 to 56; Fluor, up 1 3/8 to 51, and Inland Steel, up 5/8 to 34 1/4.

But profit takers clipped Eaton, off 1 5/8 to 58; Cummins, down 1 1/2 to 46 3/4, and Deere, down 1 7/8 to 88.

* Some retail issues were strong. Dayton Hudson surged 2 1/2 to 75 3/4 after Lehman Bros. upgraded the stock. Also rising was California electronics retailer Good Guys, up 1 1/8 to 17 7/8 after it said sales are running above expectations and that it will open eight or nine new stores in the Southland this year.

* SCEcorp, parent of Southern California Edison, fell 7/8 to 17 1/2 in heavy trading. The Times reported Monday that some analysts expect the company to cut its dividend.

Overseas, markets were mixed. London’s FTSE-100 index sank 41.5 points to 3,264.4 on fears that no additional interest rate cuts are forthcoming in Britain.

But Tokyo’s Nikkei index rose 86.51 points to 19,898.39, and Frankfurt’s DAX index added 15.13 points to 2,124.04.

In Mexico City, the Bolsa index slid 30.48 points to 2,571.41.

Elsewhere:

* Gold held steady, reacting calmly to news that Japan plans to sell 90 metric tons of gold, or $1.14 billion worth. On New York’s Comex, April gold futures added 80 cents to $377.70 an ounce.

“The amount (of gold) is insignificant . . . (but) the symbolism of this is immeasurable, in that we have the first-ever gold sale from one of the Western world’s principal hoarding nations,” said Andy Smith, bullion analyst with Union Bank of Switzerland.

* Crude oil futures prices were unchanged after tumbling Monday.