Bond Yields Plunge Again; Small Stocks Soar

Market Overview

* Another low inflation report sent bond yields tumbling for a second straight day Wednesday as buyers returned to the market.

* Small stocks surged to new highs and the broad market also advanced, but the Dow industrials closed slightly lower.

Credit

The bond market rally that began Tuesday gathered a powerful head of steam with the release of the government’s report of February consumer inflation, which showed another mild increase in prices.

The yield on the Treasury’s 30-year bond, which sank from 6.95% Monday to 6.87% on Tuesday, dropped sharply to 6.79% on Wednesday.

That was the lowest yield in a week.

Shorter-term yields also tumbled. The yield on the three-month T-bill dropped from 3.65% to 3.60%.

Interest rates have been on the rise for much of this year, as bond traders have worried that the expanding economy would stoke inflation. But Wednesday’s report of a 0.3% rise in consumer prices in February went along with Tuesday’s news of a similarly low reading on wholesale inflation for the month.

The lack of inflationary pressure has at least stemmed the recent heavy selling in bonds and has attracted some buyers to the market, traders said.

But analysts caution that the market may be assuming that the low-inflation reports will keep the Federal Reserve Board from raising short-term interest rates again soon. In fact, experts say, there is a significant chance that the Fed will notch up rates when its policy-making committee meets Tuesday.

Fed officials have argued that higher short-term rates are needed to moderate the economy’s growth and keep inflation at bay, even if there are as yet no signs of serious price problems.

Other Markets

Smaller stocks paced the market’s gains while blue chips languished.

Traders said the sharp decline in bond yields helped stoke investor optimism in the stock market, sending the Russell 2,000 index of smaller stocks to a record high, up 2.25 points to 269.11.

Another index, the Nasdaq composite of mostly smaller stocks, jumped 5.47 points to 798.99, just below its all-time high of 800.47.

The Dow industrials, by contrast, eased 1.44 points to 3,848.15 and remain well below their peak of 3,978.36.

The stock market took a dive in February in response to rising interest rates. But even before yields began to retreat this week, investors had been returning to smaller stocks and ignoring many blue chips.

On Wednesday, the Dow stocks also suffered from late volatility related to the scheduled triple expiration Friday of key options and futures contracts.

Among the market highlights:

* Another rally in technology issues helped buoy the small-stock market. Gainers included Dell Computer, up 7/8 to 27 1/4; Newbridge Networks, up 2 1/2 to 62 1/2; Powersoft, up 4 1/4 to 62 1/2, and Peoplesoft, up 3 1/4 to 39.

Software stocks were in part reacting to the surprise announcement of a friendly merger between Adobe Systems and Aldus. Adobe, the buyer, fell 3 to 29 1/2, but Aldus shot up 6 to 32 1/4.

* California Micro Devices soared 7 1/4 to 21 1/4. The company said Hitachi Metals will purchase a 10% stake in the firm in return for a licensing agreement.

* Financial stocks rebounded, driven by falling interest rates. American Express gained 1 1/8 to 30 1/2, First Interstate jumped 3 3/8 to 72 7/8, Wells Fargo leaped 4 7/8 to 144 and Charles Schwab surged 1 5/8 to 31.

In addition, Los Angeles-based brokerage Jefferies Group rocketed 9 1/2 to 40 1/8 after announcing that it will take its brokerage-technology unit public in a stock offering.

* Energy stocks gained as oil prices rose. Chevron jumped 1 3/4 to 89 3/4, Arco rose 1 5/8 to 99 1/8, Halliburton soared 1 5/8 to 32 1/8 and Amoco was up 2 1/2 to 54 5/8.

* Nike ran up 3 to 57 1/2 after the athletic shoe giant issued an upbeat earnings forecast.

Stocks were mixed overseas. Tokyo’s Nikkei average added 168.92 points to 20,677.77 and Frankfurt’s DAX index gained 7.14 points to 2,172.73, but London’s FTSE-100 index dropped 24.5 points to 3,242.9.

In Mexico City, the battered Bolsa index stabilized, adding 20.2 points to 2,382.23.

Elsewhere:

* Near-term gold futures eased $2 to $384.90 on the Comex and silver lost 8.5 cents to $5.38.

* Light, sweet crude oil for April rallied up 23 cents to $15.06 a barrel.