Bond Yields Ease; Stocks Mixed
Bond yields pulled back slightly Tuesday from Monday’s 15-month highs, while the stock market closed mixed after a sharp midday drop in blue chips.
One day after the Federal Reserve Board’s third official boost in short-term interest rates this year, bonds enjoyed a surprisingly calm day, traders said.
A steep decline in key commodity prices helped the bond market by lessening inflation worries. Also, economic reports pointed to the possibility of slower growth ahead, which may take pressure off the Fed to boost rates further.
The yield on the Treasury’s 30-year bond, which had rocketed from 7.28% on Friday to 7.42% on Monday after the Fed tightened credit again, eased to 7.37% on Tuesday. Shorter-term yields were mostly unchanged.
In the stock market, the Dow industrials closed off just 0.60 point at 3,619.82, after tumbling more than 30 points at midday.
Stocks’ overall tone was still negative--losers topped winners by 2 to 1 on the New York Stock Exchange in active trading--but some analysts said they were encouraged by strength in some of the market’s most beaten-down groups.
The Dow utility index, for example, gained 1.45 points to 195.56. And the NYSE financial stock index added 0.04 point to 209.02, while the NYSE composite lost 0.33 point to 245.37.
Any signs that the economy is slowing would mean that the Fed’s braking action, via higher short-term interest rates, is working. In turn, that could preclude additional Fed rate hikes.
Some analysts said Tuesday’s Commerce Department report on the nation’s trade deficit indicated that the economy may indeed be losing steam. The government said the February deficit was $9.71 billion, the worst in six years.
Of greatest concern was a sharp drop in U.S. exports, as foreign nations bought fewer U.S. goods. Because exports have been a major source of strength for U.S. manufacturers, the plunge in exports in February could take the wind out of the manufacturing sector’s sails, analysts said.
“This is leakage out of the economy,” Gary Schlossberg, senior economist at Wells Fargo Bank, said of the trade imbalance.
Meanwhile, falling commodity prices also dampened worries about economic strength spurring inflation. The Commodity Research Bureau index of key commodities tumbled 1.93 points to 220.21, near its 1994 low.
Gold led the decline, losing $5.30 to $371.50 an ounce on the New York Comex after South Africa’s Inkatha Freedom Party agreed to participate in the country’s first all-race elections next week--lessening fears that outright civil war will erupt and disrupt the nation’s gold mining operations.
Silver also fell, losing 5.4 cents to $5.21 an ounce. And at the New York Merc, July platinum futures dropped $5.60 to $388 an ounce, a 2 1/2-month low.
Among other commodities, May crude oil futures eased 16 cents to $16.49 a barrel, while most grain prices also lost ground.
The slide in commodities may have persuaded some bond market “short sellers” to cover their positions by buying bonds, traders said. In a short sale, an investor sells a borrowed bond, expecting its price to decline further (and thus its yield to rise). But if the bond market were to begin rallying, short sales would become losing trades--forcing the sellers to scramble to buy bonds to close out their positions.
Among Tuesday’s stock highlights:
* The Nasdaq composite index of mostly smaller stocks was slammed by another selloff in the tech sector. Some investors have been unenthusiastic about tech firms’ quarterly earnings reports.
Intel, for example, lost 1 to 57 1/2, while Autodesk dropped 1 3/8 to 51 7/8, Oracle sank 1 3/4 to 27 7/8 and Newbridge Networks dove 4 1/4 to 45 1/2. The Nasdaq composite slid 7.60 points to 712.85, its lowest close since last Aug. 3.
* On the up side, Microsoft rocketed 5 1/8 to 88 1/8 on its quarterly earnings report.
* Industrial stocks were pressured as profit takers hit the auto stocks again, unimpressed with Chrysler’s quarterly earnings report. News of falling U.S. industrial exports also hurt. Chrysler fell 2 3/8 to 48 1/2, GM lost 1 5/8 to 55 1/4 and Ford slumped 1 1/2 to 56 3/8.
Among other industrials, International Paper lost 1 7/8 to 62 7/8, Caterpillar dropped 2 to 108 3/8 and Varity tumbled 2 3/4 to 38 1/8.
* The market’s strength was concentrated in some consumer, financial and utility issues, all of which could benefit by default if investors turn away from recently hot industrial stocks.
In the consumer area, Procter & Gamble gained 1 3/8 to 54 5/8 and Schering-Plough zoomed 2 5/8 to 57 3/4.
Among financial issues, General Re gained 2 5/8 to 118 1/8, NationsBank added 1 1/8 to 53 3/8 and Chubb was up 2 3/8 to 78 5/8.
In the utility sector, Houston Industries rose 3/4 to 35 7/8 and SCEcorp was up 3/8 to 16 1/2.
* Mexico City’s Bolsa stock index plunged 72.85 points, or 3.4%, to 2,064.77, suffering another broad selloff on worries about rising Mexican interest rates.
* In Tokyo, the Nikkei index eased 85.02 points to 20,192.34, while Frankfurt’s DAX index plummeted 56.36 points to 2,172.42 and London’s FTSE-100 index lost 10.2 points to 3,128.0.
