Bond Yields Slide on Fed Rate Move; Stocks Hold Steady
The Federal Reserve Board tightened credit Tuesday for the second time in two months, but financial markets’ reaction was vastly different this time around.
Bond yields tumbled and stock prices held mostly steady after the Fed made its credit move public at midday. At the close of trading, the Treasury’s benchmark 30-year bond yield was at 6.85%, down sharply from Monday’s 6.95%.
The Dow Jones industrial average eased 2.30 points to 3,862.55, but winning stocks edged losing issues in moderate trading on the New York Stock Exchange.
The market outcome Tuesday stood in dramatic contrast to what occurred Feb. 4, when the Fed made its first credit-tightening move in five years: Bond yields rose across the board, and the Dow industrials plummeted 96.24 points to 3,871.42.
Analysts said the markets’ generally favorable reaction to the Fed’s second increase in short-term interest rates in part reflected relief that the central bank didn’t go further than expected.
The Fed wasn’t specific about its plans, except to say that it would “increase slightly” its upward pressure on short-term rates. Most economists expect that to translate into a quarter-point increase today in the federal funds rate, a key short-term market interest rate.
On Feb. 4, the Fed boosted that rate from 3% to 3.25%. With today’s expected rise, fed funds will be at 3.50%.
Analysts say the bond market had in recent weeks already factored this second Fed move into market interest rates. Three-month Treasury bill yields, for example, had jumped from 3.28% on Feb. 4 to 3.61% as of Monday. On Tuesday, the T-bill yield slipped to 3.60% after the Fed announcement.
“I think the market had begun to build in a 50-basis-point (half-percentage-point) move in short rates,” said Gary Schlossberg, economist at Wells Fargo Bank.
Long-term bond yields fell Tuesday partly for the same reason, analysts said. In addition, “short” sellers who had sold borrowed bonds, betting that a bigger Fed rate increase would send bond yields soaring again, may have rushed to buy bonds to cover their bad bets.
But some analysts also said the bond market may finally be giving the Fed credit for its stated purpose in boosting short rates--which is to restrain the economy and thus inflation, the No. 1 threat to the bond market’s health.
“I think the bond market is believing now that the Fed can slow the economy to a simmer” without a significant inflation threat, economist Lynn Reaser at First Interstate Bank said.
Yet there were signs Tuesday that other investors remain convinced that inflation will rise this year with the stronger economy, despite tighter credit. Silver and gold prices both advanced sharply, in what almost appeared to be a challenge to the Fed.
Silver futures for May rocketed 17.3 cents to $5.60 an ounce on the Comex, the highest in more than four years. And near-term gold futures gained $3.40 to $389.20 an ounce, a two-month high.
Meanwhile, the stock market took the Fed’s latest move, and the bond market rally, in stride.
Most market indexes finished little changed in moderate trading. Many analysts believe the stock market is looking beyond higher interest rates to the prospects for a continued improvement in corporate profits as the economy grows at a decent pace.
Among the market highlights:
* Many manufacturing issues regained their footing. Alcoa rose 1 1/4 to 78 3/8, Bethlehem Steel jumped 3/4 to 22 1/8, Stanley Works gained 3/4 to 41 3/8 and Eaton added 1 1/8 to 60 1/2.
Also, Maytag surged 1 3/8 to 19 7/8 after advising analysts to raise first-quarter earnings estimates.
* Utility and financial stocks rallied as interest rates fell. American Electric Power rose 7/8 to 32 7/8, Consolidated Ed added 5/8 to 30 5/8, Wells Fargo gained 2 to 145 1/2 and Charles Schwab was up 3/4 to 31.
* Many tech stocks continued to rise. Wyle Labs gained 1/2 to 19 5/8, Microsoft rose 1 1/2 to 84 3/4, Texas Instruments was up 1 to 88 5/8 and America Online soared 4 3/4 to 79 1/4.
* On the downside, drug stocks slumped after Sandoz said it will sell its new anti-cholesterol drug for as much as half what its rivals charge. Merck tumbled 1 1/2 to 30 1/2, Lilly sank 2 5/8 to 53 1/2, Bristol-Myers dropped 1 3/8 to 53 1/8, Schering-Plough lost 2 to 57 1/2 and Warner Lambert eased 1 to 62 1/4.
* Tobacco stocks fell after a House subcommittee voted to raise the federal cigarette tax $1.25 a pack to help pay for health care reforms. Philip Morris was off 1 7/8 to 52 1/8 and RJR Nabisco fell 1/2 to 6 1/8.
In foreign markets, Mexico City’s Bolsa index rocketed 128.91 points to 2,511.92 after a potential rival to the ruling political party decided against running for president.
Hong Kong stocks also rebounded, with the Hang Seng index up 345.14 points to 9,012.17.
Tokyo’s Nikkei index fell 215.92 points to 20,253.53, while Frankfurt’s DAX index added 10.06 points to 2,141.34 and London’s FTSE-100 inched up 3.5 points to 3,201.5.
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* FED TIGHTENS
The Fed voted to boost short-term interest rates. A1
