Surge in Bond Yields Sends Dow Tumbling 31.23 Points : Markets: Investors are spooked by government report showing inflation in the first quarter rose faster than expected.
Long-term bond yields posted one of their biggest one-day rises ever on news that a key measure of inflation ran at a surprisingly high rate in the first quarter.
The latest jump in yields, after nearly a full week in which they had declined, dashed hopes for a sustained turnaround in the battered bond market, analysts said.
The rate on the Treasury’s bellwether 30-year bond soared to 7.26% on Thursday from 7.10% on Tuesday, the last time bonds traded before Wednesday’s day of mourning for former President Richard Nixon.
Bonds’ selloff Thursday also clipped the stock market, where the Dow Jones industrials fell 31.23 points to 3,668.31. However, broader stock indexes were mixed.
Traders said bond yields initially fell Thursday morning, after the government reported that the nation’s gross domestic product grew at a moderate 2.6% annual rate in the first quarter.
That was less than the 3.2% expected by many economists, leading some investors to conclude that the economy is weakening--an environment that could allow for lower interest rates.
But digging deeper into the GDP report, investors quickly panicked over the first-quarter change in the government’s so-called price deflator, a measure of inflation throughout the economy.
That index rose at an annual rate of 2.6% in the quarter, higher than expected and the biggest gain since 1993’s first quarter.
The deflator number reinforced the idea that the Federal Reserve Board will feel compelled to raise short-term interest rates further to fight inflation, analysts said. The Fed has already boosted short rates from 3% to 3.75% this year, in turn pushing longer-term yields up sharply.
“In Treasuries, the trend is clear in most people’s mind. We’re going to see higher rates,” said Reid Smith, a bond fund manager for Vanguard Group.
The renewed selloff in long-term Treasury bonds spilled into other bond markets Thursday, driving yields up on mortgage-backed securities, municipal issues and other fixed-income securities.
“There’s so much negative feeling in the market . . . that they (investors) just don’t want to commit money,” said Mark Romano, who manages $500 million at First Interstate Capital Management.
News of dismal demand at the Treasury’s sale of five-year notes Thursday also depressed investors.
The Treasury sold $11 billion in five-year notes at a top yield of 6.60%. That was higher than the 6.56% many market participants had expected.
Demonstrating the weak demand for the notes, the bid-to-cover ratio--the number of bids received to those accepted--was 2.13 to 1, compared to an average of 2.70 in the last 20 such auctions.
Bond experts fear that the latest negative turn of sentiment in the market will drive more small investors out of bond mutual funds, whose share prices have been falling as older, fixed-rate bonds are devalued by higher market rates.
Many bond fund shares have already lost 5% to 10% of their value so far this year. In March, bond fund investors pulled a net $7.7 billion out of the funds.
Meanwhile, in the stock market, the reaction to surging yields was surprisingly muted. Losers topped winners by 13 to 9 on the New York Stock Exchange, but most stock indexes suffered smaller losses than the Dow, and some even rose.
The Russell 2,000 index of smaller stocks, for example, edged up 0.36 point to 251.31.
But many traders believe stocks will be unable to continue their recent rebound without help in the form of stable interest rates.
Among stocks’ highlights:
* Many financial issues lost ground as interest rates jumped. Morgan Stanley dropped 1 7/8 to 61, Citicorp fell 5/8 to 36 3/4, NationsBank sank 7/8 to 51 1/4 and American International Group slid 2 7/8 to 86.
* Some industrial issues were also pressured. Caterpillar dropped 1 3/4 to 108 7/8, Deere shed 1 3/8 to 77 1/2, Alcoa lost 7/8 to 67 7/8 and Bearings lost 3/4 to 33.
* Another fall in oil prices weighed on energy stocks. Crude oil futures on the New York Merc dropped 34 cents to $16.57 a barrel. Among oil giants, Chevron tumbled 2 1/4 to 88 5/8, Mobil dropped 2 1/4 to 77 3/8 and Amoco was off 1 to 55 3/4.
* On the plus side, some airline stocks were stronger after Delta said it will eliminate up to 20% of its work force. Delta gained 1 7/8 to 45 1/4 and USAir rose 5/8 to 7 1/4.
* SciClone Pharmaceuticals and Alpha 1 Biomedical shares lost about two-thirds of their value after their hepatitis drug failed to perform better than a placebo in clinical tests. SciClone shares closed down 7 9/16 to 5 3/16. Alpha fell 4 13/16 to 2.
Overseas, London’s FTSE-100 index fell 20.1 points to 3,129.9; Frankfurt’s DAX index eased 2.35 points to 2,251.22. Tokyo’s Nikkei index was off 3.90 points at 19,725.25, while Mexico’s Bolsa index lost 11.55 points to 2,321.33.
* MIXED SIGNALS: The recovery cooled but prices rose unexpectedly in the first quarter. A1
