Long-term bond yields shot up to 2 1/4-year highs Tuesday after the Federal Reserve Board decided to maintain interest rates for now. But short-term yields fell.
A nearly $4 jump in gold prices added to inflation worries among traders in long-term securities. Gold is often used by investors as a hedge against inflation prospects.
The dollar dipped, and in the stock market, blue chips outperformed the broader market for the second straight session. The Dow Jones industrial average ended up 13.80 at 3,863.04. More stocks lost ground than gained on the Big Board, however, and the other exchanges were essentially flat.
"The movement in gold directed things," said David de Rosa, a director at Swiss Bank Corp. in New York. "The gold market reacted to the Fed as if there will be higher rates of inflation. Bonds headed for the hills and that took the dollar down."
While largely expected, the Fed news reinforced market worries that the central bank may be falling behind in its efforts to curb inflation, which gradually harms the value of securities that don't mature for many years.
Most economists and market players had previously predicted the Fed would wait until at least next month to push up interest rates for the sixth time this year.
The yield of the Treasury's main 30-year bond increased to 7.84%, the highest close since June 23, 1992, and up from 7.79%.
But short-term maturities moved in the opposite direction. For example, the yield on the three-month bill tumbled to 4.83%.
Market analysts said the rush to buy Treasury bills reflected relief that short-term maturities would hold their value for now. The central bank targets short-term rates to carry out its monetary policy, and higher rates on new securities tend to hurt the value of already-sold investments that pay a fixed rate of return.
With all the attention on the Fed, investors largely ignored a report that showed unexpectedly weak consumer optimism in the economy. The Conference Board reported its September consumer confidence index slipped to 88.4 from 90.4 in August.
Gold and other precious metals prices surged in domestic dealings after falling slightly overseas. On New York's Commodity Exchange, gold for current delivery rose $3.70 to $398.00 per troy ounce, while the heavily traded December futures contract shot above the key $400 level.
On the Comex, silver for current delivery rose 9 cents to $5.712 per troy ounce. In London, silver closed at $5.64, down 2 cents.
Gold mining stocks got a boost from the rise in the metal. Newmont Mining gained 1 to 46 3/4 and Placer Dome added 5/8 to 25 7/8.
The Fed inaction doesn't rule out another rise in rates soon, said Michael Metz, a vice president at Oppenheimer & Co.
"The non-news is out now. But the probability is we will have a move by the Fed in the next month or so," Metz said.
Instead of being preoccupied with rates, investors now might wonder whether the Fed is more fearful of an economic downfall than of future inflation, according to Metz.
Among Tuesday's market highlights:
* Among economically sensitive, Dow Jones component stocks, International Paper rose 1 3/8 to 79, Goodyear Tire & Rubber gained 7/8 to 33, while DuPont rose 1/4 to 57 3/4. Alcoa rose 1 3/4 to 87 1/8 after PaineWebber upgraded the stock.
Gap dropped 3/4 to 31 3/8 in heavy trading. Traders said Wall Street analysts cut earnings forecasts on the retailer.
General Motors rose 3/4 to 47 1/2 despite a United Auto Workers strike at a key parts plant.
Baby Superstores surged to close at 34 3/4 on heavy Nasdaq volume on its first day of trading. The stock's initial price was 18, and it hit a high of 38 during the session.
* Meanwhile in the corporate bond market, prices of Greyhound bonds plummeted after the company said it would delay a $4.2-million interest payment. Greyhound Lines Inc. said it wanted time to develop a restructuring plan.
* The drug sector was rejuvenated by Congress' abandonment of health care reform legislation for this year. Several pharmaceutical stocks were active on the NYSE including Merck, up 1 1/8 to 36; Johnson & Johnson, up 2 1/8 to 51 1/4, and Pfizer, up 1 3/8 to 69 3/8.
* Nynex jumped 2 to 38 and was among the most heavily traded NYSE issues. The regional telephone company submitted a plan to state regulators today to cut basic rates in New York while freezing other higher rates for seven years.
Long-distance companies criticized the plan, saying Nynex is using it to hold off potential competitors.
* Varying performances by stocks overseas didn't have much bearing on U.S. trading. Stocks stumbled in Tokyo and the European markets were mixed.
* The dollar plunged more than a pfennig on the German mark, reflecting some disappointment with the central bank's inaction. Higher U.S. rates tend to attract deposits in dollars and give the currency a boost.
Against the Japanese yen, the dollar's losses were more modest, with dealers reluctant to make bets in either direction amid uncertainty about the outcome of the stalemated U.S.-Japan trade talks.