Pessimism Halts Bond Rally; Stocks Up 6.91

The Treasury market rally triggered by the Federal Reserve’s interest rate increase stalled Wednesday, as bond investors renewed their pessimistic outlook on interest rates and sent prices moderately lower. Stocks rose however, as Wall Street took the view that the Fed will leave interest rates untouched for a while.

The yield on the 30-year bond rose to 6.89% from 6.85% late Tuesday, while its price, which moves in the opposite direction, dropped 17/32 point, or $5.31 per $1,000 in face amount.

Strength in stocks of cyclical companies, including auto and consumer products makers, lifted the Dow Jones industrial average 6.91 points to 3,869.46. In the broader market, gainers outnumbered losers by about 6 to 5 on the New York Stock Exchange. Trading was moderately active, with Big Board volume totaling 284.6 million shares changing hands.

Treasury bonds immediately rallied after the Fed issued a brief statement Tuesday saying it would tighten credit slightly following its five-hour meeting of central bank policy-makers. The Fed made a similar announcement in early February.

The Fed took steps to push up the federal funds rate, the interest that banks charge each other, to 3.5%, up from 3.25% previously.

The rate was quoted at 3.438% late Wednesday, down from 3.5% Tuesday.

Uncertainty about yet another rate increase put an end to Tuesday’s rally. In a rising interest rate environment, there is less room for profits in the bond market.

“There’s no reason to believe the market has a lot of upside to it. The fact we’re able to get back to these levels indicates the market still has plenty of problems,” said Jim Kenney, head government securities trader at Prudential Securities Inc.

Meanwhile, in the stock market, several broadly based market measures also finished modestly higher. The NYSE composite index edged 0.04 to 260.28, and the Nasdaq composite index of mostly smaller stocks advanced 1.17 to 797.51. But Standard & Poor’s 500 stock index slipped 0.26 to 468.54.

“People breathed a collective sigh of relief that the Fed was not more Draconian in its tightening move,” said John H. Shaughnessy, director of research at Advest Inc. “The fact that the Fed didn’t raise the discount rate was taken to mean that the Fed is serious but won’t break the back of this recovery in its anti-inflationary zeal.”

Among the market highlights:

* Losers among the blue chips included International Business Machines, which shed 1 to 57 1/4. The Wall Street Journal’s Heard on the Street column raised question’s about the strength of the computer maker’s financial comeback.

* Lomas Financial jumped 1 3/4 to 9 1/8 and was active on the Big Board after the company said it was considering merging with another company or being acquired.

* Among cyclical stocks, auto makers stood out. Chrysler gained 3/4 to 58 1/8, Ford jumped 1 3/4 to 63 3/8 and General Motors rose 7/8 to 60 1/2.

* Elsewhere, International Paper added 1 1/4 to 70 3/8 and Caterpillar rose 2 to 120 3/4.

* Merrill Lynch upgraded near-term ratings on some tobacco companies, including Philip Morris, which rose 3/4 to 52 7/8, and RJR Reynolds, up 1/4 to 6 3/8.

* Drug stocks came under renewed pressure amid concern of harsh price competition. Forest Labs fell 3 3/4 to 47 1/4, and Pfizer slipped 1 1/2 to 55 1/2. Glaxo’s ADRs fell 1 to 18 1/2, and Merck fell 3/8 to 30 1/8.

* Oracle Systems gained 1 7/8 to 35 1/8 after it reported a rise in quarterly earnings.

Overseas markets were mixed and appeared to have little influence on Wall Street’s activity.

The Hong Kong market appeared to ignore the hike in U.S. interest rates Tuesday and plans to delist Hong Kong brokerage firm Jardine Matheson. The Hang Seng Index jumped 453.36 points, up 5.03%, to close at 9,465.53. Tokyo’s 225-share Nikkei average dropped 291.43 points, to close at 19,962.10, while in London, the Financial Times 100-share average ended down 46.2 points at 3,155.3. In Frankfurt, the DAX 30-share average closed at 2,161.13, up 19.79 points.

In other markets:

* Silver futures prices strengthened further on the New York Comex as speculators caught on to a suddenly hot market that has pushed the metal to a four-year high. Silver bullion for current delivery traded at $5.613 an ounce, up from $5.593 late Tuesday.

Gold bullion for current delivery settled at $387 an ounce, down $2.20 from late Tuesday. Oil prices finished lower, helped down by a surprisingly large increase in U.S. crude inventories. But the drop was tempered by the pending meeting of OPEC oil ministers. Light sweet crude oil for delivery in May settled at $14.90 per barrel, down 26 cents, at the New York Merc.

* The dollar declined against most major currencies in light trading motivated largely by technical factors.