Rumor of Run on U.S. Notes Boosts Bonds; Dow Up 27.37 : Securities: Yields fall and stocks break their losing streak. U.S. dollar-support efforts appear to be working.

Treasury bonds surged in value Tuesday and yields posted their biggest decline since early April, as a rally in the dollar and heavy demand at a Treasury note sale buoyed Wall Street.

Stocks got a lift as well, and the Dow Jones industrials rose 27.37 points to 3,656.41.

Rumors that European central banks had joined forces to buy huge amounts of Treasury securities swept world financial markets and added momentum to bond, stock and dollar gains.

In the bond market, the 30-year T-bond gained $13.75 per $1,000 face value, and its yield fell to 7.50% from Monday’s 18-month-high of 7.63%. The yield’s decline was the biggest one-day drop since April 5.

In currency markets, the dollar surged to a six-week high against the Japanese yen as traders began to sense that the Clinton Administration’s plan to shore up the dollar, announced last week, might be working.

The dollar climbed to 104.68 yen in New York from 102.68 yen Monday. It reached a session’s high at 140.80--its highest level since April 11.

The dollar also soared to 1.675 German marks in New York from 1.653 marks Monday.

The dollar gained as the German Bundesbank and the Bank of Japan cut short-term interest rates overnight. With the Federal Reserve Board expected to raise U.S. short-term interest rates again soon, foreign investors may be inclined to leave German and Japanese securities for U.S. securities.

Indeed, a steady dollar means overseas investors can take advantage of the big run-up in U.S. bond yields of the past three months, said Peter Hirsch, head government bond trader at Salomon Brothers.

Bond yields were 6.3% when the Federal Reserve began raising interest rates three months ago.

“If you’ve got a stable dollar--and it seems like we have--our market is incredibly cheap relative to other markets around the world,” Hirsch said. “I don’t think anybody saw anything but buyers all day.”

Meantime, the Treasury sold $17 billion of three-year notes at a yield of 6.54%--below the expected 6.55% yield.

“The three-year went real well,” said Andrew Brenner, a senior trader at Nomura Securities International. “I got lifted out of a lot of (securities) today” by customers, he said.

The Treasury received bids totaling $48.25 billion and accepted $17.10 billion for the three-year notes.

And, in a sign of strong demand from small investors, the Treasury said it received $1.45 billion of non-competitive tenders for the notes, up from $846 million for notes auctioned on Feb. 8.

Such offers are usually submitted by small investors who agree to accept the average yield on the notes.

In the bond market overall, foreigners were thought to be active buyers, led by central banks.

In the stock market, shares rallied broadly Tuesday, snapping a four-session losing streak.

The Dow industrials’ gain of 27.37 points offset some of the 85 points lost in the last four sessions amid interest rate worries.

In the broader market, advancing issues outnumbered declining ones 1,316 to 881 in trading of 295.62 million shares on the New York Stock Exchange.

The Nasdaq composite index rose 2.04 points to 725.00.

But the stock market was still uneasy about the prospects for higher short-term interest rates.

Stronger-than-expected April jobs data, released Friday, led the markets to anticipate a quick Fed move to raise rates. The increase did not immediately materialize, and that gave rise to worries that the Fed was not acting decisively against inflation.

Analysts said they expected stocks to remain choppy and defensive until the interest rate picture becomes clearer.

“The major concern is still that we’re faced with a series of short-term interest rate hikes, beginning with the one that will probably happen next Tuesday,” said Jack Shaughnessy, director of research at Advest, alluding to the next meeting of the policy-setting Federal Open Market Committee.

“The question is: To be followed by how many more?”

* The gain in blue chips was broad-based. Caterpillar advanced 1 1/8 to 106 3/4; IBM rose 7/8 to 57 7/8; Sears was up 7/8 to 47 3/8 and JP Morgan rose 5/8 to 62 7/8.

* AT&T; rose 1 1/8 to 52 7/8 on news that it has won a $4-billion contract to modernize telecommunications in Saudi Arabia.

* Florida utility FPL Corp. rebounded 1 1/2 to 29 after shedding 4 3/8 on Monday, on news of a cut in its dividend. Other utilities stocks, however, extended their recent slump amid concern that their dividends were at risk. American Electric Power fell 1 3/8 to 28; Houston Industries dropped 7/8 to 31 3/4; Oklahoma G & E fell 1 1/4 to 32.

* Boston Chicken rose 1 1/4 to 37 1/2 after reporting earnings.

Strength in stocks overseas was a plus for Wall Street.

In Mexico City, the Bolsa index soared 65.51 points, or 3.05%, to close at 2,213.09. In Tokyo, the Nikkei 225-share average closed up 130.82 points at 19,917.78.

London’s Financial Times 100-share average gained 38.5 points to close at 3,136.3. Frankfurt’s 30-share DAX average ended at 2,235.15, up 16.27 points.