Dow Falls 41 After Fed Rate Hike; Bond Yields Hit 15-Month High : Markets: Central bank’s third increase this year triggers wave of selling but no panic. Bond traders fear further hikes lie ahead.
Bond yields surged and stock prices slumped Monday, as investors were caught off guard by another Federal Reserve Board move to tighten credit.
In the battered bond market, any hope that the selling trend of recent weeks had exhausted itself was dashed, and traders again dumped bonds and sent yields soaring. The jump in U.S. yields triggered a similar rise in Europe.
In the stock market, the Dow Jones industrial average dropped 41.05 points to 3,620.42, its lowest close since it fell to 3,593.35 during the selling frenzy of April 4. Trading volume, however, was only moderate Monday.
Analysts said the Fed’s decision to raise short-term rates by an estimated quarter-point, the third such increase this year, shocked investors because most believed the Fed was weeks away from such action.
“This move took everybody by surprise,” said Robert Brusca, economist at Nikko Securities International in New York. Last week’s economic statistics, he said, were tame enough to suggest that the Fed had some time to consider whether tighter credit was warranted to further brake the economy and inflationary pressures.
Most analysts thought the Fed would weigh its options until at least May 17, when its policy-making Open Market Committee is to meet.
Wall Streeters said the timing of Monday’s move was particularly unnerving to the beleaguered bond market, because it could suggest that the Fed sees more pent-up inflation in the economy than has been recognized by consumers and investors.
“The Fed is making rate moves that don’t seem to relate to anything” known to the rest of the country, Brusca said. Increasingly unsure as to how high the Fed ultimately might push short-term interest rates, many bond traders and investors have been bailing out of bonds since early February--an exodus that accelerated anew on Monday.
The selling was reflected in another across-the-board rise in bond yields. The yield on one-year Treasury bills, which was 3.83% after the Fed’s first rate boost Feb. 4, leaped to 4.89% from 4.72% on Friday.
The 30-year Treasury bond yield jumped to 7.42% from 7.28% on Friday, to its highest level since President Clinton was inaugurated in January, 1993.
Yields on other types of bonds, including tax-exempt municipal issues and mortgage-backed issues, also rose sharply, in the kind of chain reaction that has become all too familiar to owners of bonds and bond funds this year.
The Fed’s move also rekindled selling of long-term bonds in Europe. The yield on Britain’s benchmark long-term bond rocketed to 7.90% from 7.68% on Friday. In Germany, 10-year government bonds yielded 6.47%, up from 6.36% on Friday.
Analysts said the renewed rise in European yields threatened to aggravate the recession on the Continent. Indeed, the major problem for Europe, Asia and Latin America this year is that their long-term interest rates are following U.S. rates upward, though the economic fundamentals abroad don’t dictate higher rates.
The continuing debacle in the bond market has partly been attributed to excessive 1993 speculation in bonds by Wall Street dealers, so-called hedge funds and other players who had wrongly bet that long-term yields would continue to drop this year.
By borrowing short-term in 1993 to buy long-term bonds, these players have suffered a double whammy: Each Fed hike in short-term rates increases the “carrying” cost of bonds, while each rise in long-term rates devalues existing bonds, leaving their owners with large losses on paper.
Forced liquidations on the part of many of these speculators have helped drive long-term yields higher than what otherwise might have occurred. And Monday’s selling wave indicated that such liquidations have not yet run their course.
“We feel there’s still more to go” in terms of higher bond yields, warned Bob Auwaerter, a bond fund manager at the Vanguard Group in Valley Forge, Pa.
In the stock market, meanwhile, the Dow sank 45 points after the Fed announced the rate hike Monday morning, and it held at lower levels until the close. Losers topped winners 16 to 6 on the New York Stock Exchange and by 16 to 10 on Nasdaq.
But trading volume was relatively sluggish, typical for a Monday. And the damage to broader market indexes was mixed. Surprisingly, the Dow utility index, usually the most sensitive to higher interest rates, eased just 0.13 point to 194.11.
Greg Nie, technical analyst at Kemper Securities in Chicago, said the shrinking level of trading in recent weeks suggests the market is stabilizing and that it could hold to a narrow range for the next few months rather than break decisively lower. But, he said, that is assuming that long-term interest rates stop rising soon.
“If we pierce 7.5% (on the 30-year T-bond), that will spell more trouble” for stocks, Nie said.
Industrial stocks were weak Monday. Some health care and energy issues showed strength. Financial stocks were mixed.
In the Dow, Alcoa fell 1 3/8 to 66 3/8 and GE dropped 1 7/8 to 94 7/8. Merck, however, added 3/8 to 28 3/4.
Among energy stocks, Sonat gained 3/4 to 29 3/4, Ashland Oil rose 1 to 41 3/4 and Atlantic Richfield edged up 3/8 to 99. May oil futures rose 7 cents to $16.65 a barrel on the New York Merc .
In other markets:
* Mexican stock prices plunged with Wall Street. The Bolsa index lost 61.02 points to 2,137.62.
* In London, the FTSE-100 index sank 30.1 points to 3,138.2. Tokyo’s Nikkei average inched up 112.73 points to 20,277.36.
* Near-term gold futures eased 90 cents to $376.80 an ounce on the Comex.
* ANOTHER FED INCREASE: The Fed raised the key federal funds rate. A1
* BLOW TO STATE RECOVERY?: The hike is seen as bad news for California firms. A1
Another Surge in Yields
The Federal Reserve Board’s latest boost in short-term interest rates, announced Monday, sent short- and long-term market rates higher again. How key rates have risen since the Fed first tightened credit on Feb. 4: Monday: 3-month Treasury security yields: 3.77 1-year Treasury security yields: 4.89 10-year Treasury security yields: 7.15
