Bond yields rose sharply Friday as rising commodity prices fueled inflation fears and the dollar slumped to a two-week low against the German mark.
But stocks ended mixed, despite the rising interest rates and the falling dollar.
The Treasury's bellwether 30-year bond yield closed at 7.30%, up from 7.23% on Thursday. Its price, which moves in the opposite direction, fell 25/32 point, or $7.81 per $1,000 in face value.
The day began with bonds trading lower because of a selloff overseas before the U.S. markets opened, said John Canavan, an analyst with Stone & McCarthy Research Associates Inc. in Princeton, N.J.
And with the Federal Reserve Board's short-term interest rate increases out of the way for now, and no important economic data for guidance, the bond market followed the dollar.
The dollar spent the day falling against the German mark and the Japanese yen, among other key currencies. A weaker dollar makes dollar-denominated securities less valuable to foreign investors.
In New York, the dollar fetched 1.647 German marks, down from Thursday's 1.657. The greenback fell to 104.05 Japanese yen, down from 104.25.
The dollar opened lower against the mark in Europe, as the German currency retained strength from comments Thursday by Bundesbank President Hans Tietmeyer that interest rates will remain steady. Traders watched for central bank intervention as the dollar selloff continued, and when no action was taken, the currency continued to fall.
Meanwhile, futures prices of most commodities, including gold, oil and grains, advanced.
Gold shot higher on the New York Comex, closing at $385.90 an ounce, up $4.50. Light, sweet crude oil settled at $18.92 per barrel, up 47 cents, at the New York Merc, its highest level in almost a year.
This was considered a sign of inflation, which the bond market abhors because it erodes the value of fixed-income securities such as Treasury notes.
Canavan also said there was volatility in the market as futures options expired about 1 p.m. and traders rushed to square their positions. The long bond fell as much as 1 1/32 points.
Stocks followed bond prices lower most of the day, but buy programs kicked in near the close and pushed the Dow Jones industrial average into positive territory. The blue chip average ended up 7.37 to 3,766.35, boosting the week's gains to 106.67.
The Dow lost as much as 17 points by midafternoon. Then options expirations prompted program traders to move in.
However, declining issues outnumbered advancers by 1,145 to 1,030 on the New York Stock Exchange, where 293.52 million shares changed hands, down from 307.35 million on Thursday.
Broad-market indexes were mixed. The NYSE's composite index fell 0.58 to 251.58. The Standard & Poor's composite index fell 1.56 to 454.92. The Nasdaq composite index of mostly smaller companies fell 0.61 to 726.70.
Among Friday's stock market highlights:
* Autodesk dropped 2 3/4 to 50 1/4. Prudential Securities and Alex. Brown cut their estimates, citing a product delay.
* Amoco gained 2 to 58 1/4 and Prudential Securities upgraded the stock to "buy" from "hold."
* Chrysler, which raised its dividend 25% on Thursday, gained 1 3/8 to 48 1/2. Ford added 5/8 to 59 3/4 and General Motors tacked on 1/8 to 55 3/8.
* Kansas City Southern eased 1 3/8 to 44 1/8. The stock was up sharply earlier in the week on speculation its rail unit may be sold for $2 billion.
* Conrail, hit by a surprise strike that led to a halt of rail operations, ended down 1 at 53 3/4. Other rails were weak, with CSX down 2 3/4 to 73 1/4 and Burlington Northern off 1 3/8 at 56.
* Philip Morris rose 2 1/2 to 53 3/4 after falling 1 3/4 on Thursday in reaction to reports of an anti-smoking legal campaign.
* Sears rose 1 1/8 to 50 7/8, Chevron rose 1 to 88 3/4, IBM advanced 1 to 62 3/8 and International Paper added 1 to 69 3/8. But Walt Disney lost 1 1/8 to 43 1/8 and Caterpillar fell 3/8 to 110 1/8.
* Bank stocks stumbled on the rise in interest rates. BankAmerica fell 1 1/8 to 47 1/2. Citicorp lost 5/8 to 39.
Stocks closed higher in foreign trading. Tokyo's 225-share Nikkei average ended up 120.83 at 20,342.17. In Europe, Frankfurt's DAX 30-share average closed at 2,249.65, up 1.89 points, while in London, the Financial Times 100-share average gained 4.5 points to end at 3,127.3.
Mexico City's Bolsa Index closed 12.39 points higher at 2,417.3.
Selected Interest Rates Averages of daily rates ended Thursday, in percent.
Corporate AAA bonds: 7.94%
90-day CDs: 4.56%
3-month Treasury bills: 4.18%
Bank prime rate: 6.75%
Municipal bonds: 6.32%
Federal funds rate: 4.02%
Discount rate: 3.00%
Source: Federal Reserve Board