FINANCIAL MARKETS : Bonds Renew Their Selloff; Stocks Drop
Bond yields headed higher again Thursday, taking the stock market down.
Despite new reports suggesting economic moderation, the 30-year Treasury bond yield jumped to 8.15% from 8.09% on Wednesday, after nearly reaching 8.2%.
In the stock market, the Dow industrial average fell 17.15 points to 3,828.05 after being down as many as 36 points.
The broad market was far weaker, with declining issues outnumbering advancers by nearly 2 to 1 on the New York Stock Exchange.
Analysts said the bond market simply couldn’t get a rally going, even though the Federal Reserve Bank of Philadelphia said its index of regional business activity and index of prices fell in November, a sign of moderating growth. Regional surveys are often watched for first clues to the national economy’s direction.
Instead, investors focused on the Philadelphia survey’s finer points, such as increases in employment and the average workweek, which could foreshadow higher wage inflation.
Bonds also failed to take any comfort in the government’s report that housing starts fell 5.2% in October, the first drop in four months.
Bond market participants said major sellers of U.S. government bonds included large holders of mortgage-backed securities seeking to hedge, or offset, potential losses with gains from Treasury securities.
“The fact we couldn’t rally on good news forced traders to sell into continued weakness,” said Eric Hamilton, market analyst at Technical Data.
Analysts also traced the market slump to a “calendar effect.”
“It has been a horrible year, and over the past several weeks money managers have been raising cash and lessening exposure to the market, so they are simply not responding to good news,” said Ward McCarthy, managing director of Stone & McCarthy Research Associates. “They want to end the year in a defensive posture.”
The stock market tracked bonds because stock investors fear further increases in short-term interest rates by the Federal Reserve Board if inflation concerns remain high, analysts said.
“As long as the Fed’s in your face and there’s no sign of a peak in rates, stocks really can’t make a major move on the upside,” said Larry Wachtel, market analyst at Prudential Securities.
“But so long as the economy’s good enough to support profits, there will be no major move on the downside, either,” he said.
Among the market highlights:
* Banking and financial stocks fell as analysts worried that rising interest rates could squeeze margins. Citicorp fell 1 1/8 to 44, BankAmerica declined 3/4 to 40 3/8 and NationsBank lost 1 to 46 1/2.
* Auto stocks and many cyclical issues lost ground on the premise that higher interest rates could choke off economic growth. Chrysler fell 1 1/4 to 49 3/4. General Motors slid 1 1/8 to 38 1/2 and Ford lost 3/8 to 28 3/8.
* Overseas stock markets were mixed. The Nikkei in Tokyo rose 0.2%, but the DAX in Frankfurt lost 0.4% and London’s FT-SE fell 0.60%.
* Lumber prices retreated from recent sharp advances, pressured by an unexpectedly large drop in housing starts last month and the prospect of even higher mortgage rates. The lumber market had jumped 15% in the past week.
January lumber fell $4 to $349.50 per thousand board feet at the Chicago Mercantile Exchange, retracing part of this week’s $47 rally.
