Bond Yields Break 7% Level, Forcing Dow to 3-Month Low
In a potentially damaging blow to investor psychology, Treasury bond yields on Friday closed above the important 7% level for the first time since last May, while blue-chip stocks fell to near three-month lows.
But in Mexico City, stocks closed with only small losses after a deep selloff at the start of trading.
While many investors were focused on the potential for a meltdown in Mexico after Wednesday’s assassination of presidential hopeful Luis Donaldo Colosio, the surprise was that U.S. markets went into a free fall late in the day:
* A surge of concern over simmering political and economic issues sent the yield on 30-year Treasury bonds to 7.01% from 6.95% on Thursday, pulling shorter-term yields up as well.
* The Dow Jones industrials, cuing off the bond market, tumbled 46.36 points to 3,774.73, the lowest close since the index was at 3,756.60 on Jan. 3. The broader market also was lower, though trading was slow and smaller stocks were hit much less.
Traders said the vortex for market fears on Friday was in Chicago futures markets, where speculators use futures and options contracts to bet on or hedge against market moves in New York.
A wave of selling in Treasury bond futures undercut prices of the securities in New York, in turn tripping the stock market, analysts said.
The 30-year T-bond yield’s close above 7%--for the first time since last May 25--was viewed as psychologically damaging to markets, because breaking below that yield last year was a major triumph for Wall Street.
“Seven percent was an important barrier, and if you break through it you cause even more pessimism,” warned David Jones, economist at bond dealer Aubrey G. Lanston & Co. in New York.
The T-bond yield had reached a 21-year low of 5.79% last fall, on extraordinary optimism about a shrinking federal budget deficit and the likelihood of continuing low inflation in a moderate-growth economy.
But this year, interest rates have surged as the economy’s surprisingly robust growth has fueled renewed inflation concerns, causing the Federal Reserve Board to tighten credit twice over the past two months--most recently this week.
While the Fed’s goal in boosting short-term interest rates is ultimately to fight inflation, bond traders have bid long-term interest rates higher as well, in what some economists describe as a knee-jerk reaction. The T-bond yield had flirted with 7% for several weeks, before finally breaking through that level late Friday.
Some analysts said mounting concerns over political issues--from the Clinton Administration’s Whitewater affair to Mexico’s assassination to North Korean nuclear secrecy--finally toppled market sentiment on Friday.
“Every kind of unexpected event that you could imagine has hit us on the political side,” Jones said.
Bond traders also noted that the market’s failure to sustain its Tuesday rally--when long-term yields dropped sharply after the Fed officially announced its second quarter-point boost in short-term rates this year--had disheartened many investors. Long-term yields began to rise again on Wednesday, suggesting that the market was unwilling to give the Fed the benefit of the doubt in the fight against inflation.
Meanwhile, rising interest rates and growing political worries combined have unnerved the stock market. Some Wall Streeters fear that consumer and business confidence could be upended if President Clinton is further implicated in the Whitewater scandal.
The Dow, which had tumbled 48.37 points on Thursday in reaction to the Mexican assassination, held up for much of Friday before sinking late in the day.
The Dow’s loss for the week was 120.92 points, the largest weekly point decline since the index fell 216.26 points in the week ended Oct. 13, 1989.
In the broad market, most key indexes closed with much smaller losses on Friday after plummeting on Thursday. The Russell 2,000 index of smaller stocks eased just 0.62 point to 266.45 on Friday.
On the New York Stock Exchange, losers topped winners by 12 to 8 on Friday, while winners edged losers on the Nasdaq market.
Still, analysts said the selling of many industrial issues on Friday was a bad sign, because those stocks have been the market leaders over the past year.
Chrysler, for example, dropped 2 5/8 to 53 1/2 on Friday. Deere slumped 2 3/8 to 84 3/8, Bethlehem Steel lost 1 1/2 to 20 7/8 and Alcoa fell 2 to 76 1/4.
Traders said the urge to take profits in those leading stocks could indicate that many investors are throwing in the towel, unwilling to stick with the market in the face of higher interest rates and mounting political risks.
In Mexico City, meanwhile, the Bolsa index closed with a loss of just 22.79 points, to 2,520.78, after plunging more than 100 points, or 4%, early in the day.
The Mexican peso was also dragged down in early trading, though it stabilized to close 2.76 centavos lower at 3.353 pesos to the dollar.
The market had been closed on Thursday in mourning for Colosio. Despite the heavy selling at the opening on Friday, buyers returned and the market’s tone improved through the day.
Analysts said many investors believe Mexico’s ruling party, the PRI, will be able to field a strong candidate to replace Colosio, and will go on to win the August presidential elections.
But some experts also noted Friday that the Mexican government itself was helping to stabilize stock prices through Nafinsa, the country’s major economic development bank.
Scott Galle, analyst with D.A. Campbell Co. in Los Angeles, said Nafinsa appeared to be placing bids to buy stocks just under their market prices Friday, effectively providing a floor for the stocks and helping to restore investor confidence.
Among U.S.-traded Mexican stocks, Telmex gained 2 3/8 to 62 1/2, Grupo Tribasa surged 1 5/8 to 29 and Empresas ICA rose 1 1/8 to 27.
Other Latin American stock markets in general were higher. Argentina’s major stock index rose 2.2%, Brazil’s jumped 6% and Chile’s was up 0.8%.
Other market highlights Friday:
* Other industrial issues falling included Rockwell, off 1 3/8 to 40; ITT, down 2 1/8 to 82; GM, off 1 1/2 to 56 7/8; and Varity, down 2 1/4 to 45 1/4.
* Technology stocks followed industrials lower. Apple dropped 1 3/4 to 32 3/4, IBM plunged 2 3/8 to 54, Compaq sank 3 1/8 to 99 1/2, Motorola tumbled 3 3/8 to 101 3/4 and Lotus slumped 4 1/2 to 76 1/4.
* Gold and silver were mixed. Near-term gold futures eased 60 cents to $391 on the Comex, while silver added 5.6 cents to $5.78.
* The dollar ended little changed, stabilizing after Thursday’s heavy selling linked to the Clinton Whitewater scandal and the murder of Mexico’s top presidential candidate.
