Bond Yields Ease; Dow Off 0.60
Treasury bond yields retreated Tuesday from a sharp rise the day before, as the stock market struggled through a volatile session to close mostly lower.
Bonds were helped by new evidence of economic weakness and lessened anxiety about inflation.
Yields of the main, 30-year bond eased to 7.37% from Monday’s 7.42%. The bond’s price, which moves in the opposite direction, rose 17/32 point, or about $5.31 per $1,000 in face value.
The Dow Jones average finished virtually flat at 3,619.82, off 0.60. It dipped below the 3,600-level before managing a comeback. However, declining issues outnumbered advancing ones about 2 to 1 on the New York Stock Exchange. Big Board volume came to 323.75 million shares as of 4 p.m., up from 271.48 million shares Monday.
Bond trading strategists saw a number of forces working in the bond market’s favor on Tuesday.
The Commerce Department’s report that the U.S. trade deficit ballooned to $9.71 billion in February, partly because of a surge in imports, raised some questions about the strength of the nationwide economy.
A number of economic forecasters indicated they would be revising downward their first-quarter growth assessments, which had generally been in the range of 4% to 3.5% or less.
“This is leakage out of the economy,” Gary Schlossberg, senior economist at Wells Fargo Bank in San Francisco, said of the trade imbalance.
The bond market tends to rally on economic weakness because that implies less inflation, which preserves the value of fixed-income investments. Inflation makes those investments worth less over time.
Traders said the market also drew strength from falling commodity prices, another sign of low inflation. The Commodity Research Bureau index, a measurement of raw materials prices, dropped sharply on Tuesday.
Meanwhile, smaller stocks fared far worse. The Nasdaq composite index closed at an eight-month low that reflected selling of technology and medical issues. The Nasdaq composite index fell 7.60 to 712.85, its lowest close since Aug. 3, when it finished at 708.86.
Several broader market indicators ended lower or almost neutral. The New York Stock Exchange composite index fell 0.33 to 245.37; Standard & Poor’s 500 stock index edged up 0.08 to 442.54.
Stocks sank to the depths of the session around the middle of the day, when selling intensified in the bond market. Buying picked up again in the stock market when the bond selloff subsided.
Hugh Johnson, chief investment strategist at First Albany Corp., said the stock and bond markets seem convinced that the Federal Reserve will have to tighten credit policy another notch or so, to ward off inflation. But investors also fear that in the process, the Fed will choke off economic expansion and thereby curb corporate earnings growth.
With these concerns in mind, prices of economically sensitive stocks slumped and weighed down the overall market. The cyclicals had benefited from improving economic conditions.
Among the market highlights:
* Chrysler failed to surprise Wall Street with its record results, and its stock tumbled 2 3/8 to 48 1/2. Other auto stocks also declined. General Motors dropped 1 5/8 to 55 1/4; Ford skidded 1 1/2 to 56 3/8.
* Semiconductor giant Intel reported strong earnings, but analysts voiced caution over its weakening profit margins. The stock fell 1 to 57 1/2.
* Among utilities, Houston Industries rose 3/4 to 35 7/8 and Peco Energy was up 1/4 to 27 7/8.
With the corporate earnings season in full swing, stocks reflected reaction to the news.
* Philip Morris rose 1 3/4 to 51 7/8 after reporting first-quarter earnings that beat analysts’ expectations. Philip Morris kept the Dow Jones industrial average from having a larger deficit.
* Microsoft rallied 5 1/8 to 88 1/8. Its quarterly earnings were better than expected.
* GTE gained 1 1/2 to 31 5/8 after it posted sharply higher first-quarter earnings.
* Health care stocks were hurt by anticipation about industrywide reforms. Senate Majority Leader George Mitchell made remarks on cost containment in a speech to the Independent Insurance Agents of America. U.S. Healthcare tumbled 3 to 43 1/4.
* Merck fell 3/8 to 28 3/8 even though is posted sharply higher earnings.
Weakness in stocks overseas reflected the slump Wall Street suffered Monday. Mexico City’s Bolsa index plunged 72.85 points, or 3.41%, to 2,064.77, its lowest close this year, on expectations of further increases in already high interest rates. The 36-share index finished lower.
Tokyo’s 225-share Nikkei average ended down 85.02 points at 20,192.34. In Frankfurt, the 30-share DAX average closed down 56.36 points to 2,172.42, while London’s Financial Times 100-share average fell 10.2 points to 3,128.0.
Hong Kong’s key Hang Seng index sank 202.93 points, or 2.13%, to close at 9,303.91.
In other markets:
* The dollar fell against major foreign currencies for the second day, as markets reacted to the short-term interest rate increase imposed a day earlier by the Federal Reserve.
* Gold prices fell on the New York Comex to $371.50 an ounce, down $5.30. Silver closed at $5.206 an ounce, down 5.4 cents.
