Your Money : FINANCIAL MARKETS : Bond Yields Drop Sharply; Dow Gains 34
Signs of moderating economic growth drove Treasury bond yields sharply lower Thursday, which in turn sent stock prices soaring.
A broad advance by the dollar against key foreign currencies also aided both markets.
The yield on the Treasury’s 30-year bond tumbled to 7.53% from Wednesday’s 7.68%, in a powerful rally.
Interest rates fell across the board, with the yield on one-year T-bills slumping to 5.33% from 5.48% on Wednesday.
Reacting to bonds’ gains, the Dow Jones industrial average surged 34.97 points to 3,739.25, as winners topped losers by 16 to 6 on the Big Board. Trading was the busiest since mid-June.
Analysts said news of weaker-than-expected U.S. retail sales in June, and a pickup in weekly unemployment claims, increased some investors’ conviction that economic growth is slowing.
The bond market has been starved for such news, because bond investors have feared that fast growth will drive up inflation and force the Federal Reserve Board to boost short-term interest rates again.
The Commerce Department reported Thursday that retail sales rose a smaller-than-expected 0.6% in June. Moreover, the report showed that sales dropped a revised 0.4% in May--double the earlier 0.2% estimate--and a full 1% in April. Thus, the June rebound was even less significant.
Also Thursday, the Labor Department reported that the number of first-time claims for state unemployment benefits jumped a larger-than-expected 19,000 last week, the biggest increase in two months and another potential sign of a slowing economy.
“What’s been holding the market down has been fear of rising rates and the consequences of the weak dollar,” said Bob Stovall, president of Stovall/21st Advisers.
“If you remove those two fears, for a day anyhow, the market’s going to bounce.”
Worries about the battered dollar were lessened Thursday as it rallied sharply, after Treasury Secretary Lloyd Bentsen said the Clinton Administration wants a strong currency.
Bentsen’s comments refueled a rebound in the dollar that had begun Wednesday. The dollar jumped to close at 1.555 German marks and 98.60 Japanese yen in New York, up from Wednesday’s 1.539 marks and 98.30 yen.
Despite the gains in bonds, the dollar and stocks, however, many analysts were cautious. They noted that all three markets rallied in part because of “short-covering” by traders who had bet that the recent deep decline in the markets would continue.
When a trader sells short, he sells a borrowed security in the hopes of replacing it later at a lower price. But if markets begin to rise, the trader may be compelled to rush in and buy the security to cover his position, to avoid large losses.
Such short-covering when markets turn upward can bolster rallies, but they aren’t long-lasting unless true investors begin to buy as well, analysts note.
Traders said the bond market, in particular, was ripe for a short-covering rally.
Among the stock market highlights:
* Leading Dow stocks included AT&T;, up 1 1/8 to 54 1/2; IBM, up 1 1/2 to 58 1/4; United Technologies, up 1 3/8 to 66 1/8; and 3M, up 1 to 51 5/8;
* Takeover announcements helped boost the market. Medical supplies maker Kendall International jumped 3 to 54 after Tyco International said it would buy Kendall for $1.4 billion. Tyco lost 1 3/4 to 45 5/8.
Also, QVC Network gained 1 7/16 to 43 7/16, continuing to rise in response to Comcast’s takeover offer. Comcast shares added 1/2 to 15 5/8 after diving Wednesday.
Wireless communications giant Nextel Communication’s takeover offer for OneComm sent the latter’s stock up 8 1/4 to 28 1/2, and also boosted stocks of other wireless firms, including Dial Page, up 5 3/4 to 30 3/4; Pittencrief, up 2 3/8 to 14 3/8; and Qualcomm, up 3 to 19 1/2. Nextel shares eased 5/8 to 29 1/4.
* Lumber and paper stocks rallied on the back of strong earnings and improved industry fundamentals. Louisiana Pacific gained 2 to 31 1/4, Potlatch added 1 1/8 to 39 1/4 and Weyerhaueser rose 1 1/8 to 41.
* Technology stocks rallied early in the day, continuing their recent rebound. But some late announcements quashed the rally.
Computer networker Cisco Systems told analysts that it may face difficulty meeting analysts’ expectations in the fiscal fourth quarter ending July 31.
That sent Cisco down 4 1/4 to 19 3/4 and also hurt other networking stocks, including Wellfleet Communications, down 1 1/8 to 19 7/8; Newbridge Networks, down 3 3/8 to 39 3/4; and Cabletron Systems, down 5 1/4 to 105.
Also, computer retailer MicroAge plunged 7 3/4 to 10 after warning that its profit margins are shrinking as competition increases.
* Among Southland issues, golfclub head maker Coastcast lost 1 5/8 to 23 3/4 despite reporting that quarterly earnings nearly doubled.
Overseas, London’s FTSE-100 index built on Wednesday’s rally, jumping 45.1 points to 3,050.4. But in Frankfurt the DAX index rose just 1.62 points to 2,055.62.
In Tokyo the Nikkei average gained 177.63 points to finish at 20,718.04.
In Mexico City the Bolsa index climbed 17.91 points to 2,282.78.
Market Roundup, D6
