In a stunning reversal of Tuesday’s rally, bond yields soared Wednesday after a disappointing Treasury note auction spread more gloom over Wall Street.
The renewed selloff in bonds also pulled the Dow Jones industrials down 27.37 points to 3,629.04, clipped the dollar and drove gold and silver prices higher.
Dejected traders and money managers were at a loss to explain the markets’ wild mood swings, except to state what some believe is obvious: “We’re in a bear market,” said Chris Madell, a trader at First Chicago Capital Markets.
In the bond market, the yield on the 30-year Treasury bond rocketed to close at 7.59%, up from 7.49% on Tuesday but down from an intra-day high of 7.66%.
The bond market crumbled at midday, immediately after the Treasury announced the results of its quarterly auction of $12 billion in 10-year notes.
Despite a good reception for three-year notes auctioned Tuesday, far fewer buyers than expected bid for the 10-year notes. As a result, the Treasury was forced to pay an average yield of 7.36%, higher than expected.
The lack of demand for the notes was clear from the bid-to-cover ratio, or the number of bids received to those accepted. The ratio was 1.88, far below the average of 2.4 for auctions in recent years and the weakest since the Aug. 8, 1990, note sale, which followed Iraq’s invasion of Kuwait.
Traders said investors’ unwillingness to buy 10-year, fixed-rate bonds reflected concerns about higher inflation in the strengthening economy, and uncertainty over the Federal Reserve Board’s next interest rate move.
The Fed is expected to raise short-term rates another quarter- to half-point next week, but some Wall Streeters fear the Fed is tightening credit too slowly to achieve its goal of moderating the economy’s growth.
Also weighing on the minds of potential bond buyers Wednesday was concern over today’s government report on April wholesale inflation and Friday’s report on April consumer inflation. Worried that the numbers might show surprising price increases, some traders opted not to take a chance on the Treasury’s 10-year notes.
Craig Hintze, money manager at Seattle’s Olympic Capital Management, said the auction was a sign that investors aren’t ready to bet on lower rates anytime soon, despite the feeling that rates have run up too far, too fast this year.
“The auction is a reflection of what the investing community is willing to do,” Hintze said. “People looked up and said, ‘I don’t want to get long’ ” in bonds.
In the stock market, meanwhile, investor sentiment was briefly buoyed after Germany cut key short-term interest rates half a point. That raised new hopes that higher U.S. interest rates paired with lower German rates will result in a stronger dollar, which could attract more foreign investors to U.S. stocks.
But the selloff in bonds quickly slammed stocks lower. The Dow’s loss of 27.37 points was exactly what it gained Tuesday.
In the broader market, losers swamped winners by about 7 to 3 on the New York Stock Exchange, as volume retreated to 277.4 million shares. Most major market indexes lost about 1% for the day.
Analysts say a key test for the market will be whether the Dow can hold at about 3,600, which is where it found support in early April and again in mid-April.
Among Wednesday’s highlights:
* Utility stocks plummeted for the fourth time in five sessions, pummeled by rising interest rates and by fears of widespread dividend cuts as the industry prepares for greater competition. The Dow utility index sank 5.21 points, or 2.8%, to 178.35, its lowest close in more than five years.
Florida utility FPL Group, which plunged earlier this week when it cut its dividend, fell another 1/2 to 28 5/8. Other losers included Commonwealth Edison, down 1 to 22 1/8; Houston Industries, down 1 3/4 to 30; SCEcorp, down 3/8 to 14 1/4, and Consolidated Edison, off 1 to 27 7/8.
* Tobacco stocks slumped on new worries about the anti-cigarette furor on Capitol Hill. Philip Morris dropped 1 3/4 to 47 1/2, American Brands tumbled 1 3/8 to 30 3/4 and Monk-Austin sank 1 3/4 to 14 5/8.
* Many industrial stocks were lower. Rockwell fell 1 1/4 to 35 3/8, Monsanto dropped 1 5/8 to 79 5/8, Inland Steel was off 1 1/8 to 30 5/8 and Ford tumbled 1 3/8 to 57 7/8.
* Many tech stocks were weak, led by computer disk drive makers, which were downgraded by brokerage Robertson Stephens. Among drive makers, Conner Peripherals slumped 1 5/8 to 12 1/4 and Western Digital fell 1 1/2 to 13 1/8.
Other tech losers included Compaq, down 2 3/8 to 106 3/8; Dell, down 1 5/8 to 24 3/8; Autodesk, down 1 5/8 to 52 1/8, and Texas Instruments, off 2 1/4 to 72 3/4.
In foreign markets, European stocks felt little effect from German interest rate cuts. Frankfurt’s DAX index rose 8.48 points to 2,243.63 while London’s FTSE-100 index eased 5.8 points to 3,130.5.
Tokyo rallied, however. The Nikkei index rose 232.35 points to 20,150.13. But Mexico City’s Bolsa fell 33.52 points to 2,179.57.
In commodities trading, gold and silver gained as stocks and bonds lost ground. On the Comex, near-term gold futures rose $3.00 to $381.80 an ounce. Silver jumped 15 cents to $5.43.
But the dollar closed mostly lower, unfazed by Germany’s rate cuts and unable to sustain Tuesday’s big rally. In New York, the dollar eased to 104.33 yen and 1.669 marks, from 104.40 yen and 1.674 marks Tuesday.