Yields Fall on Fed Interview; Stocks Mixed
Bond yields dropped to six-week lows Monday, spurred by a newspaper report suggesting that the Federal Reserve Board expects stable interest rates for the near future.
But the stock market failed to take heart from the latest bond rally, and blue chip indexes eased. The Dow industrials slipped 3.70 points to 3,768.52 in light trading.
In the bond market, the rally that began last week picked up steam in the wake of a New York Times report on the mood at the nation’s central bank.
The story said three of the five Fed governors interviewed expressed belief that economic growth has slowed and that inflation is under control.
Some bond investors inferred from the article that the Fed won’t boost short-term interest rates further anytime soon. If the Fed holds steady and the economy slows, many economists believe, long-term interest rates could continue to fall.
Bond traders seized on the New York Times article Monday to push the yield on 30-year Treasury bonds down to 7.22% from 7.26% on Friday. The 30-year bond yield hasn’t been that low since April 27.
Short-term yields also fell Monday. The yield on two-year T-notes dropped to 5.77% from 5.86%.
“My sense is, we’ve had a turn in psychology,” said William Stevens, a managing director at Montgomery Asset Management, a Walnut Creek, Calif., investment firm with $3 billion in assets. “People won’t mind (owning bonds) if the Fed’s on hold for a while.”
Bonds were also bolstered by another plunge in grain prices, as weekend showers in the Midwest and forecasts for more rain this week dispelled concern that dry weather could damage crops.
Soybeans for November delivery, which represent this year’s crop, slumped 28.75 cents to $6.31 a bushel. July corn futures slid 8 cents to $2.66 a bushel.
Lumber futures also lost ground, on expectations of slower demand for new homes this summer. Lumber for July delivery fell $10 to $383.30 per thousand board feet.
The Commodity Research Bureau index of key commodities, which recently hit a 3 1/2-year high, tumbled 3.21 points, or 1.4%, to 228.84.
With each decline in commodity prices, fear of higher inflation also ebbs, encouraging more investors to buy bonds, analysts note. Or at least to buy U.S. bonds: While yields continue to fall here, European bond yields are rising as investors bail out on signs of economic strength.
German and British bond yields rose again Monday. The turmoil in European bond markets is believed to be driving some investors out of those bonds and into the U.S. market.
Indeed, the dollar gained again against the German mark Monday, a sign that money is moving from German to U.S. securities. In New York, the dollar rose to 1.671 marks from 1.670 on Friday.
Despite the U.S. bond market’s rally, stocks closed mixed.
The Dow industrials had been up more than 20 points late in the day, before “program” selling hit.
“It was a typical, low-volume, profit-taking type of day,” said Tony Dwyer, chief market strategist at Sherwood Research.
Still, the broad market was fairly strong: Winners topped losers by 13 to 8 on the NYSE and by 14 to 12 on Nasdaq. The Nasdaq composite index added 1.05 points to 743.43.
Many analysts believe stocks can mount a strong rally soon if interest rates ease further.
Among Monday’s highlights:
* Microsoft jumped 1 5/8 to 54 1/2 on record Nasdaq volume of 47.8 million shares. As previously announced, the stock was added to the Standard & Poor’s 500 index at the close of trading Monday. The addition of a stock to the index prompts purchases by investment funds that seek to replicate the index’s performance.
* Health maintenance organization shares rallied, and some hit all-time highs. U.S. HealthCare soared 1 7/8 to 42 after Salomon Bros. repeated its “buy” rating.
Other HMO gainers included PacifiCare A shares, up 1 1/2 to 59 3/4; FHP, up 7/8 to 25 1/4, and United Healthcare, up 7/8 to 50 1/2.
* Builders’ stocks rose, which some analysts tied to falling lumber prices. Centex surged 1 3/8 to 26 1/2, Kaufman & Broad added 3/8 to 16 and Ryland was up 3/8 to 18 1/2.
* On the downside, Times parent Times Mirror tumbled 3 to 32 3/4. The stock had jumped 3 3/4 on Friday on news that the company will spin off its cable subsidiary.
* Computer retailer CompUSA slid 2 5/8 to 9 3/8. It said late Friday that financial results in the current quarter won’t meet expectations.
Overseas, Tokyo’s Nikkei index was hit by profit takers and dropped 227.54 points to 20,726.65.
In Europe, Frankfurt’s DAX average gained 14.68 points to 2,163.07 and London’s FTSE-100 index added 11.6 points to 3,009.4.
Mexico City’s Bolsa index rose 29.86 points to 2,494.84.
