Long-term bond yields fell for a second consecutive session Tuesday, as market optimism intensified ahead of Federal Reserve Chairman Alan Greenspan's congressional testimony.
At the same time, the dollar rose despite news that the U.S. trade deficit widened in May. Stocks fell in lethargic trading.
In the credit markets, the Treasury's key 30-year bond fell to 7.46% from 7.50%, while its price, which moves in the opposite direction, rose 13/32 point, or $4.06 per $1,000 in face value.
Greenspan was to appear before a Senate panel today and Friday with updates on Fed economic and monetary policy, and bond traders planned to monitor his words closely for hints of interest rate moves.
Recent reports suggesting that the economy slowed in the first half of this year have convinced many bond traders that the Fed will not raise short-term interest rates before late August.
That sentiment recently has given a boost to prices of fixed-income securities. Bond market players previously feared the Fed would raise rates soon. Higher rates on new securities erode the value of already-sold bonds and other securities that pay a fixed rate of return.
"The tone of the market has turned constructive. The market is now assuming that the next tightening, at the earliest, would come probably in August or early September," said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis
Short-term Treasury securities rose 1/8 point to 5/32 point and intermediate maturities rose 7/32 point to 13/32 point, the Telerate Inc. financial information service reported.
Meanwhile, in the currency market, rumors of unrest in North Korea provided a reason for technically motivated traders to exchange Japanese yen for dollars, currency dealers said.
"Rumors started the ball rolling, but people were already looking to buy dollars for technical reasons," said Zlatko Glamuzina, chief dealer for the New York branch of Banco di Sicilia.
Currency dealers described the dollar's performance as a temporary lull in a lengthy decline. Reports circulating in the markets that tensions in North Korea had escalated triggered heavy sales of yen, causing the dollar to rise in relation to its Japanese counterpart.
Although the Commerce Department reported a widening of America's overall trade deficit in May--to $9.17 billion from $8.5 billion in April--the U.S. deficit with Japan narrowed nearly 20%, to $4.4 billion.
Analysts were doubtful, however, that the deficit figure represented a turning point in America's long-standing trade imbalance with Japan.
Still, currency dealers cheered the trade report, pushing up the dollar in New York to 99.25 Japanese yen from 98.35 yen late Monday. The dollar also gained against the German mark. It ended at 1.568 marks, up from 1.547 marks late Monday.
On Wall Street, stocks retreated amid a flood of quarterly corporate earnings reports.
Banking and technology shares were hurt by concerns about profit reports from those industries.
The blue-chip Dow Jones average fell 7.12 to 3,748.31 on the New York Stock Exchange, where volume was 251.54 million shares, up from 226.46 million shares traded Monday.
In the broader market, retreating issues outnumbered advancing ones 9 to 8 on the NYSE.
Stocks traded in a narrow range throughout the day as investors reacted to earnings reports from some of the largest companies.
GTE Corp, General Electric, Sprint and Amgen were among those posting better-than-expected earnings, and their stock prices rose accordingly.
"Earnings are coming in just about right, and there have been some nice positive surprises," said Bill Allyn, managing director at Jefferies & Co.
Still, there was enough concern about earnings in certain sectors that investors ignored the drop in interest rates. Investors often bid stock prices higher when rates fall because that means corporations have to pay less for money.
Although many companies showed good earnings, some reports contained nasty surprises that pushed down share prices.
Intel, for example, announced numbers late Monday that were in line with expectations but said profit margins shrank. Its stock fell 1 5/8 to 57 in Nasdaq trading.
And at Citicorp, although earnings were strong, trading profits were significantly lower than in last year's second quarter. Most banks reporting have shown lower trading revenues.
The Intel and Citicorp profit reports weighed on the whole industry, and it didn't help that other companies, such as Signet Banking, Merrill Lynch and Lotus Development, also posted sour results.
Still, trading was lethargic. Analysts said many investors resisted dipping into stocks before Greenspan's testimony Wednesday before the Senate Banking Committee.
Among the market highlights:
* Chase Manhattan slipped 2 3/8 to 36 3/8; Citicorp dropped 1 1/4 to 40 3/4; Signet Banking Corp. fell 4 3/8 to 36 1/2.
* Biotechnology company Amgen Inc. rose 2 1/8 to 48 7/8 after its strong earnings prompted several Wall Street brokerages to upgrade their ratings on the stock.
* Lotus Development shrank 5 5/8 to 33 1/8. The software company said product delays and pricing pressure hurt its second-quarter results.
* Compaq, which is scheduled to announce earnings today, fell 1 1/4 to 33 1/4 in heavy trading.
* Merrill Lynch retreated 7/8 to 36 1/4 after reporting second-quarter earnings of $1.18 a share, compared to $1.52 in the equivalent three months of last year. That was below market expectations of $1.36 a share for the period.
* PepsiCo was unchanged at 30 1/2. The company said second-quarter profit rose 5%, a sub-par performance that reflected lagging profits from the company's restaurants and beverage business abroad.
Stocks rose abroad. Frankfurt share prices rose sharply in the last few minutes of trading, as players covered short positions. The market mood was buoyed by hope for a Bundesbank rate cut on Thursday. The 30-share DAX average closed 30.60 points higher at 2,128.79.
Tokyo's 225-share Nikkei average ended 57.52 points higher, at 20,775.16; London's Financial Times 100-share average rose 9.3 points to 3,091.3.
The Mexico City, the Bolsa index finished 18.96 points lower at 2,255.30.
The Nasdaq index, which is heavily weighted with technology shares, was hit hardest among the market's best-known barometers. It fell 3.30 to 719.32.
Among other major market indicators, the Standard & Poor's index of 500 stocks fell 1.36 to 453.86, while the NYSE's composite index lost 0.55 to 250.89. At the American Stock Exchange, the market value index gained 1.31 to 433.90.
Market Roundup, D8