Treasury bond yields ended unchanged Thursday in a roller-coaster session influenced by wavering perceptions as to if or when the Federal Reserve Board will push up interest rates again.
It was also a big day for stocks. The Dow Jones average surpassed 4,000 for the first time and closed at 4,003.33, up 30.28 points.
The bond market started the day optimistic that the Fed was finally ready to ease its credit-tightening policy. Later, comments from Fed Vice Chairman Alan Blinder dampened investor interest and triggered a selloff.
There was a slight recovery at the end of the session. The yield of the key 30-year bond held steady at 7.54%, while its price rose 1/32 point, or 31 cents per $1,000 of face value.
In an interview, Blinder said he never intended his recent comments to mean the Fed was at the end of its credit-tightening cycle and would move to lower short-term interest rates. He said the Fed will need to study a few months' data to see if it has raised rates enough to slow the economy.
"That took a little bloom off the rose," said Maury Harris, chief economist at PaineWebber Inc. "We had a strong rally, so it was conceivable that some people decided to take profits."
Analysts said the stock market rally had little effect on Treasury securities.
Earlier in the day, the market continued to build on gains from Wednesday's session. Treasury bond prices climbed and yields sank to 5 1/2-month lows Wednesday in a broad market rally triggered by investor enthusiasm over testimony from Federal Reserve Chairman Alan Greenspan.
Greenspan had hinted to the Senate Banking Committee that the Fed might lower interest rates if economic growth sags significantly.
Market participants had interpreted his remarks as meaning the Fed was nearly finished raising rates after a year-long effort to slow growth to fend off inflation.
Greenspan strengthened that view in his second day of testimony Thursday, when he said the Fed stood ready to ease interest rates if it detects an economic downturn.
But the market's zeal in reaction to Greenspan's comments on Wednesday was quickly dissipated by Blinder's comments.
Stocks, meanwhile, got a major boost from bonds early in the session. But bonds dipped in the afternoon, causing stocks to pare their gains, as the market digested the Treasury's auction of five-year securities.
The rally in stocks was broad but not exceedingly deep. Advancing issues led declining ones about 13 to 7 on the New York Stock Exchange. Big Board volume was a hefty 394.12 million shares, up from 339.16 million shares traded Wednesday.
The widespread enthusiasm boosted other major market indexes as well, but not by as much as the blue chips. Standard & Poor's 500 stocks also rose to record highs. That index closed at 486.91, up 1.84 points and above its record of 485.22 set last Thursday.
The NYSE's composite index rose 1.20 points to 264.24. The Nasdaq composite index rose 3.42 points to 791.35. The American Stock Exchange's market value index rose 0.77 to 449.35.
Among Thursday's highlights:
Financially sensitive issues, such as banks, brokerage firms and mortgage companies, led the market higher. Profit margins at such companies tend to expand when interest rates stabilize or fall.
* J.P. Morgan led the Dow index higher, rising 1 3/8 to 63. Citicorp rose 1 to 44 3/4. Morgan Stanley climbed 1 5/8 to 66 7/8. The Federal National Mortgage Assn. rose 1 1/8 to 79 3/8.
* Merck rose 7/8 to 42 5/8. The drug maker accelerated testing of its MK-639 drug for AIDS and said early research indicated it is more effective than AZT.
* RJR Nabisco rose 1/4 to 5 5/8 and Philip Morris rose 1 1/4 to 59 1/2 after a mistrial was declared in an Indiana lung cancer patient's lawsuit.
* SmithKline Beecham rose 2 to 40 1/8, although it posted sharply lower fourth-quarter earnings.
* Morrison Knudsen rose 1 3/4 to 8 7/8. The company was meeting with creditors on restructuring its debt and seeking new financing.
* Compaq fell 2 to 34 1/8 after Morgan Stanley dropped the computer maker's stock from its "buy" list.
* Viacom "B," fell 1 1/2 to 45 1/4. The stock has been falling since the House of Representatives approved the repeal of a tax break for minority broadcasters on which Viacom was counting as part of a sale of its cable system.
* Telefonos de Mexico fell 7/8 to 28 7/8 in sympathy with the Mexican market, which sank to a 20-month low Thursday. The Bolsa index plunged 96.55 points to 1,611.73--the lowest close since June 15, 1993, when the index ended at 1,595.45.
In other overseas trading, London's Financial Times 100-share average closed up 29.8 points at 3,049.3. In Frankfurt, the 30-share DAX average gained 25.08 points to close at 2,118.24. Tokyo's 225-share Nikkei average ended 276.63 points lower at 17,830.02.