FINANCIAL MARKETS : Bond Yields Up on Rate Hike Fears
Long-term government bond yields rose to their highest levels in almost a month Thursday as renewed expectations that the Federal Reserve Board will again raise interest rates contributed to a weak government auction for 30-year Treasury bonds.
Europe’s first interest rate increases in two years and a weaker dollar helped fuel the decline.
The benchmark 30-year bond yield rose to 7.65%, eight basis points higher than Wednesday. The long bond’s price, which moves in the opposite direction, dropped 29/32 of a point, or $9.06 per $1,000 in face value.
The yield rose to 7.68%, the highest since July 14, immediately after the bond auction.
The year’s high yield is 7.75% on July 11. The two-year note yield was 6.24%, up from 6.17%.
Yields rose early in the day after government statistics on inflation and retail sales persuaded many traders that the nation’s central bank will boost short-term rates for the fifth time this year. Most analysts expect another hike of a quarter to half a percentage point next week.
The Labor Department said the producer price index--measuring inflation at the wholesale level--shot up 0.5% in July, the highest increase in 15 months.
However, the underlying inflation rate, excluding volatile energy and food prices, was up only 0.1%.
Weighing more heavily on the market, analysts said, were upward revisions by the Commerce Department in its May and June retail sales figures, indicating healthy demand into the second half of the year, despite a slight 0.1% decline in July.
The economic reports arrived just hours before major bond firms bid on the $11-billion new Treasury issue, which drew an average yield of 7.56%, above traders’ expectations of 7.55%. The high yield was 7.59%, above the anticipated 7.57%.
The last time the difference between the average and the high yield--known as the tail--was three basis points at a 30-year bond auction was in May, 1991. A wide tail indicates the major firms intentionally submitted high-yield bids to avoid winning many securities.
A falling dollar also contributed to the price decline by apparently giving another reason for the Fed to tighten. Higher interest rates tend to boost the dollar’s value because foreign investors buy dollars to take advantage of the greater returns in dollar-denominated investments.
The central banks of Sweden and Italy said they would raise interest rates. Sweden’s move was the first rate increase by a European central bank in two years.
As European rates jumped, reducing the attractiveness of the return on dollar-denominated assets, the U.S. currency slipped to a three-week low against the mark and dropped against the yen. The dollar closed in New York at 1.561 marks, down from 1.584 and the lowest level since July 18. It also fell to 100.23 Japanese yen, down from 101.35.
Meanwhile, on Wall Street, stock prices tumbled along with bond prices
The Dow Jones industrial average finished down 15.86 points at 3,750.90. Declining issues outnumbered advancers by about 13 to 7 on the New York Stock Exchange, where volume totaled 275.67 million shares.
Some technology issues continued to show some buoyancy, allowing the Nasdaq composite index to finish unchanged at 728.20.
Meanwhile, stock investors were biding their time until the Fed’s Open Market Committee meets next Tuesday.
Among the market highlights:
* Technology stocks began the day extending a two-day winning streak. They lost some ground later in the session but still outperformed the rest of the market. Compaq fell 1/8 to 35, but Micron Technology finished up 1/8 at 42 3/8.
* Intel rose 5/8 to 60 3/8, Microsoft gained 1 1/8 to 55 1/4, Sybase advanced 1 11/16 to 43 15/16, and Lotus Development gained 1 to 41 1/4.
But Apple fell 5/16 to 34 5/16 and Seagate Technology dropped 1 to 26.
* Skin and hair care products maker Neutrogena soared 4 7/8 to 26 1/2 on a Salomon Bros. report that Johnson & Johnson may be seeking to acquire it. J&J; slipped 5/8 to 47 7/8.
* Economically sensitive stocks weakened. Ford Motor fell 1/2 to 29 3/4, International Paper lost 7/8 to 74 1/8, and Caterpillar tumbled 1 1/2 to 103.
* The Gap shot up 4 3/8 to 41 1/4 after the retailer reported second-quarter net earnings of 30 cents a share, up from 20 cents a year ago.
Overseas stocks were mixed. London shares finished sharply lower as worries over interest rates returned. The Financial Times 100-share average was down 28.8 points at 3,138.2. Frankfurt’s 30-share DAX average closed 5.09 points down at 2,155.28. In Tokyo, the Nikkei 225-share average ended up 51.11 points at 20,821.36.
In Mexico City, the Bolsa index closed up 22.22 points at 2,596.89.
