FINANCIAL MARKETS : Dow Drops 20.53 as Yields Hit 2-Year High
Government bond yields rocketed to their highest levels in more than two years, sending prices plunging after release of a report suggesting that factory use is growing fast enough to accelerate inflation.
Stocks followed bond prices lower, snapping the market’s three-day winning streak that had lifted the Dow Jones industrial index to a seven-month high.
Investors began dumping bonds after the Federal Reserve Board said industrial production surged 0.7% in August, the 15th straight advance.
The central bank also reported that U.S. factories had reached operating capacity of more than 84% in August, a level often cited as a threshold for inflation pressures. The new level of 84.7% is up 0.4% from July.
By day’s end, the Treasury’s bellwether 30-year bond yield climbed to 7.77%, its highest closing since June 30, 1992. It closed at 7.63% on Thursday. Its prices, which move in the opposite direction, tumbled 1 9/16 points, or $15.63 per $1,000 in face value.
The report of economic strength fanned investors’ worries that inflation will rise in coming months and compel the Federal Reserve Board to push interest rates higher at its November policy-making meeting.
Dana Sorrentino, an economist with Stone & McCarthy Research Associates Inc. in Princeton, N.J., said the news raised concerns that a supply crunch in popular goods could push up prices at the consumer level.
On Wall Street, the Dow Jones industrial average closed 20.53 points lower at 3,933.35, in heavy trading dominated by the expiration of stock futures and options.
The broader market took its cue from the blue chip indicator, with declining issues outnumbering gainers by about 2 to 1 on the New York Stock Exchange.
The Dow had rallied 93.54 points in the previous three trading sessions, propelling the index Thursday to a seven-month high of 3,953.88, its best closing level since the Fed started raising interest rates in early February.
Half of Friday’s volume was handled in the first 1 1/2 hours as the market went to its sixth-busiest day in history. Big Board volume came to 410.78 million shares, up from Thursday’s 281.16 million.
Much of Thursday’s surge and Friday’s drop in stock prices was related to furious efforts to complete trading in options and futures tied to stock market indexes before Friday’s expiration. Four times each year, the options and futures expire at the same time in what’s known as a “triple-witching hour,” frequently causing broad price swings in the underlying stocks.
Among the market highlights:
* IBM bucked the market trend, rising 1 1/4 to 71 after Goldman Sachs set a six- to 12-month target of $80 a share.
* ITT rose 1 7/8 to 82 after saying it plans to seek buyers for its ITT Financial unit.
* American Income Holding jumped 3 7/8 to 34 on news it will be acquired for $35 a share by a unit of Torchmark Corp. Torchmark rose 3/4 to 43.
* Calgon Carbon said its third-quarter earnings would be below forecasts. Its shares fell 3/4 to 12 1/4.
* Orthomet, maker of hip and knee replacements, surged 2 1/8 to 10 3/8 after it said it was being bought by Wright Medical Technology, a private company, for $11 a share.
Overseas stocks also closed lower. In London, the FTSE-100 average fell 47.6 points to 3,065.1, a drop of 74.2 points from a week ago, while in Frankfurt, the 30-share DAX average closed up 4.75 points at 2,118.73. Tokyo’s Nikkei 225-share average ended at 19,796.26, down 123.12 points.
Mexico’s Bolsa was closed for a national holiday.
