FINANCIAL MARKETS : Bond Yields Plunge on Greenspan Remarks; Stocks Inch Higher

Long-term Treasury bond yields plummeted to 5 1/2-month lows Wednesday after Federal Reserve Board Chairman Alan Greenspan gave his strongest hint yet that the central bank may be finished raising interest rates.

The Treasury bond market’s rally, in turn, helped the state of California sell $400 million in general obligation bonds Wednesday, the first such state bond offering since Orange County’s bankruptcy filing in December.

But on Wall Street, the stock market reacted with surprising caution to the bond market’s rally. The Dow Jones industrial average added just 9.08 points to 3,973.05.

Greenspan, in comments before the Senate Banking Committee, indicated that he is certain the U.S. economy is slowing, a declaration that many analysts viewed as a sign that the Fed may not need to raise interest rates further.

More important, Greenspan for the first time suggested that the Fed is now thinking ahead to a point at which it may begin cutting short-term rates, after raising them seven times over the past 13 months.

Bond yields fell modestly in the morning, after Greenspan made those comments. But once the Treasury completed its auction of new two-year notes at midday, at an average yield of 6.99%, the bond rally boomed.

By the end of the day, the bellwether 30-year Treasury bond yield was at 7.54%, the lowest since Sept. 6 and down from 7.60% on Tuesday.

Shorter-term yields also plunged. The six-month T-bill yield dropped to 6.18% from 6.31% on Tuesday. The six-month yield was 6.49% as recently as Jan. 25.

Even though the Fed isn’t likely to cut rates anytime soon, Greenspan’s comments suggest that Wall Street’s widespread assumption of one more rate increase, in March, may be wrong and that the Fed will remain neutral at least until May.

“Maybe the Fed is admitting here that they’re really going to have to see significant evidence that the economy is still chugging along before they do anything else,” said Robert Smith III, executive vice president at Smith Affiliated Capital in New York.

Optimism about stable or lower rates helped California’s offering of $400 million in general obligation bonds go smoothly Wednesday, traders said. In competitive bidding, Merrill Lynch bought the bonds for resale to investors. Tax-free yields ranged from 5% on bonds maturing in 1997 to 6.10% on the issue maturing in 2015.

“There’s an appetite for this paper,” a Merrill official said.

The stock market, however, closed mostly higher but without the seeming euphoria in the bond market.

Rising issues outnumbered losers by about 12 to 9 on the New York Stock Exchange, and the Standard & Poor’s index of 500 stocks rose 2.33 points to 485.07.

But smaller stocks weren’t as strong. The Russell 2,000 index added just 0.08 point to 254.94.

Some traders said talk of a slowing economy may be spooking some investors, who may be worried about future corporate earnings growth.

Still, many analysts believe that a continuing bond rally will drive the stock market to new highs in the weeks ahead. The Dow is only 27 points from the 4,000 mark, traders note, and breaching that level could attract new investors to the market.

Among Wednesday’s highlights:

* Among the Dow stocks, GE rose 1 1/4 to 55 1/8, Caterpillar gained 7/8 to 52 7/8, GM added 3/4 to 41 5/8 and AT&T; climbed 3/4 to 51.

Another industrial name, Deere, jumped 1 7/8 to 78 after reporting strong quarterly earnings.

* Many high-tech stocks advanced anew, retaining their market leadership role. Micron Technology soared 3 to 59 1/8, Hewlett-Packard added 1 3/8 to 115 1/2, Dell Computer rose 1 1/2 to 46 and Microsoft jumped 1 3/4 to 61 1/2.

But Newbridge Networks dropped 4 1/8 to 35 3/4. The computer networking firm posted record third-quarter earnings Tuesday, but the numbers were still below market expectations.

* Two new stock offerings attracted strong interest on the Nasdaq market. Health care information provider HCIA rose 5 from its offering price of 14. MedPartners, which develops health care delivery networks, shot up 3 3/4 from its starting price of 13.

* On the downside, retailer Nordstrom fell 3 1/2 to 41 5/8 after its earnings report disappointed Wall Street.

Overseas, Tokyo’s 225-share Nikkei average gained 10.40 points to finish at 18,106.65. Frankfurt’s DAX index eased 3.88 points to 2,093.16, and London’s FTSE-100 index lost 3.9 points to 3,019.5.

In currency trading, the dollar continued to weaken on concerns that U.S. interest rates may have peaked. In New York, the dollar closed at 1.469 German marks, down from 1.470 on Tuesday. It also fell to 96.90 Japanese yen, down from 97.10.