Treasury bond yields rocketed Friday to their highest level in nearly two years after a report showing strong job growth nationwide triggered renewed worries that the Federal Reserve Board may again hike interest rates to slow the economy.
Meanwhile, the dollar fell following suggestions from President Clinton that market forces, not government intervention, will resolve the greenback's problems.
However, optimism about the outlook for corporate profits sent stock prices higher for a fifth straight day, with the Dow Jones industrial average gaining 20.72 points to finish at 3,709.14.
The yield on the bellwether 30-year Treasury bond finished Friday at 7.69%, its highest closing yield since it hit 7.73% on Nov. 9, 1992. The long bond finished at 7.60% on Thursday. Its price, which moves in the opposite direction, dropped 29/32 point, or $9.06 per $1,000 in face value.
Bond yields jumped soon after the Labor Department reported that the economy added 379,000 jobs in June--about 100,000 more than expected by most economists--and that the unemployment rate stayed at 6% instead of edging up to 6.2% as expected.
Analysts said many market participants now believe the Fed--which completed a two-day policy meeting Wednesday--will feel compelled to push up short-term interest rates prior to its next meeting Aug. 16.
"With data this strong and revisions throughout the prior months as well, it does show a continuing strength in the economy and inspires fear that perhaps the Fed hasn't slowed growth enough to contain inflation," said John Canavan, an analyst at Stone & McCarthy Research Associates Inc. in Princeton, N.J.
The retreat cut across the range of Treasury maturities. Economic strength can spur inflation, which hurts the value of fixed-income securities.
But shorter-term Treasury securities were hit the hardest. They fell between 1/4 point and 13/32 point, and intermediate maturities dropped between 19/32 point and 7/8 point, the Telerate Inc. financial information service reported.
The tumbling dollar, meanwhile, heightened fears that foreign investors will dump their holdings of dollar-denominated investments such as Treasury bonds.
The U.S. currency closed lower against the Japanese yen and German mark after Clinton, in Naples, Italy, for a summit of the world's seven most economically powerful nations, said he was concerned about the dollar's weakness but that coordinated government buying efforts to support the dollar don't always succeed.
Economic fundamentals will rescue the dollar from its tailspin, Clinton said.
Traders said the comments reinforced the perception that the government is prepared to let the dollar fall unaided, and that sent it tumbling.
In New York, the dollar fetched 98.05 Japanese yen, down from 98.75 on Thursday. Against the German mark, the dollar fell to 1.563 marks, down from Thursday's 1.572.
On Wall Street, a healthy quarterly earnings report from Dow component Aluminum Co. of America helped push the blue chip indicator aloft.
But the broad range of other stocks had a mixed session as equity investors couldn't completely shrug off the impact of a setback in the bond market.
In the broader market, losers led gainers by about 6 to 5 on the New York Stock Exchange, where volume totaled 236.52 million shares.
The bond market's negative reaction to June's strong employment reading initially rattled stock investors, but the selling moderated by midmorning.
For the week, the Dow industrials gained 62.49 points.
Among the stock market highlights:
* Buying was selective, with investors concentrating on cyclical stocks, which are those of companies whose earnings directly depend on economic conditions. Leading the advance in cyclicals was Aluminum Co. of America, which jumped 3 5/8 to 78 7/8 after reporting better-than-expected second-quarter earnings. Caterpillar rose 1 3/8 to 105 3/4 and Whirlpool rose 3/4 to 52 5/8.
* Nike surged 2 1/8 to 62 1/8 after it reported late Thursday better-than-expected fourth-quarter results.
* Diagnostek, which provides drugs by mail, tumbled 4 1/4 to 17 3/4 after it said late Thursday that its Arizona and New Mexico pharmacy contracts with Cigna Corp. will be terminated.
* Semiconductor stocks found buyers ahead of Monday's report on June industry demand. Intel rose 1 1/4 to 59 1/8, Cypress Semiconductor added 1 to 17 7/8 and LSI Logic closed up 1 3/8 to 28 5/8.
* J.C. Penney rose 1/2 to 49, helped by an upgrade from Kidder, Peabody.
Overseas markets were mixed in dull action. Stocks closed lower in Tokyo, Mexico City and London but rose in Frankfurt.
Market Roundup, D3
The yield on the 30-year Treasury bond Friday reached its highest level since President Clinton took office. Monthly hights, expept latest:
Selected Interest Rates
Averages of daily rates ended Thursday, in percent.
Corporate AAA bonds: 8.15%
90-day CDs: 4.80%
3-month Treasury bills: 4.25%
Bank prime rate: 7.25%
Municipal bonds: 6.28%
Federal funds rate: 4.38%
Discount rate: 3.50%
Source: Federal Reserve Board