FINANCIAL MARKETS : Dow Breaks 4,400 as Bond Rally Fizzles
The Treasury market’s powerful weeklong rally fizzled Wednesday, with bond yields turning higher at midafternoon with the release of auction results for new 10-year securities showing the least enthusiastic bids since Iraq invaded Kuwait in August, 1990.
Despite the rise in interest rates, blue-chip stocks managed to close above 4,400 for the first time, setting a new high for the third straight session as Wall Street shrugged off talk that the market was ripe for a correction.
The sudden drop in bond prices more than wiped out a nearly one-point gain in earlier activity that had seemed to intensify the rally, which in just one week has driven long-term bond yields down more than a third of a percentage point.
Analysts said the poorly received auction gave investors an excuse to sell bonds and play it safe ahead of inflation statistics due today and Friday.
Treasury bond prices initially rose, strengthened in part by the Federal Reserve Board’s release of its Beige Book of regional economic activity, which showed slower growth throughout the country.
The results seemed to support the market’s recent conviction that a weakening economy is unlikely to boost inflationary pressure.
But prices went into a free fall after the Treasury announced that it sold $12.5 billion of the 10-year notes at an average yield of 6.61%.
By day’s end, the yield on the Treasury’s main 30-year bond had risen to 6.99% from 6.94% on Tuesday. Its price, which moves in the opposite direction, dropped 21/32 point, or $6.56 per $1,000 in face value.
The auction results showed a steep 0.072 percentage point disparity between the average and high yield accepted from bidders by the Treasury, indicating anemic investor demand.
In addition, the bid-to-cover ratio--a barometer of auction demand comparing the number of bids submitted to those accepted--was 1.67 to 1. That was the weakest since August, 1990, and down from an average of 2.48 to 1 in the previous dozen 10-year note auctions.
Analysts said one reason the auction didn’t go well was that prices of securities had been driven so high by the recent run-up in the secondary market. Moreover, many players in the rally had already bought all the securities they needed.
The Dow Jones industrial average, meanwhile, rose 13.84 points to close at 4,404.62, surpassing 4,400 and breaking its record high set just the day before.
Stocks rose early in the session, as bonds continued Tuesday’s spectacular rally. When bonds lost steam in late morning, the stocks backed off.
Advancing issues edged out decliners by about 6 to 5 on the New York Stock Exchange. Big Board volume was moderately heavy at 382.47 million shares, up from 365.42 million on Tuesday.
Other market indexes finished mostly higher. The NYSE’s composite index rose 0.67 point to 282.41. The Standard & Poor’s 500-stock index rose 0.80 point to 524.26. Both indexes also beat all-time highs set on Tuesday.
The Nasdaq composite index fell 0.55 point to 847.62. The American Stock Exchange’s market value index rose 0.24 point to 483.88.
Stock prices have been climbing steadily for weeks as investors have hoped that the economy is easing into a “soft landing.” Lately, however, investors have worried that the slowdown could be enough to cause a recession and sap corporate earnings.
Among Wednesday’s highlights:
* Auto stocks have been rising this week as falling interest rates make investors more optimistic about future car sales. Morgan Stanley upgraded the issues. Ford rose 1 1/4 to 28 3/8 and was the most-active issue on the Big Board. General Motors jumped 2 1/4 to 46 and Chrysler rose 1 3/4 to 43 5/8.
* Japanese car makers’ stock was hurt by a U.S. decision to slap tough trade sanctions on Japan. Honda Motor fell 1 1/2 to 31 1/2, Toyota Motor lost 1 1/8 to 39 and Nissan Motor dropped 1 to 13 1/2.
* News Corp. jumped 2 1/2 to 23 on news that it is forming a global alliance with MCI Communications Corp. to distribute electronic information.
* Health maintenance stocks continued their broad recovery. United Healthcare rose 2 1/8 to 38 3/4, Oxford Health Plans gained 7/8 to 44 3/4, Humana was up 1 1/4 to 21 1/2 and Physicians Corp. of America rose 1 3/4 to 21 3/8.
* Best Power soared 7 45/64 to 20 45/64 after General Signal said it will buy the company for $21 a share cash. General Signal fell 3/8 to 37 1/8.
* Nordstrom lost 1 3/16 to 36 3/4 after reporting disappointing first-quarter earnings.
* Computer stocks finished mostly lower on profit-taking. Intel fell 2 1/2 to 108 3/4, while Texas Instruments was down 1 1/8 to 111 3/4. But Advanced Micro Devices rose 1 1/4 to 37 1/8.
Interest-sensitive issues turned mixed after rising early in the session as interest rates fell. Citicorp rose 3/8 to 50 3/8. J. P. Morgan, a Dow component, fell 1/4 to 68 5/8.
Elsewhere, the dollar rallied strongly against the Japanese yen after the Clinton Administration said it would file a complaint with the World Trade Organization over Tokyo’s alleged unfair trade practices.
The dollar also hit a 10-day high against the German mark, buoyed by a selloff of marks that traders stockpiled before France’s election and further indications that the German central bank may cut interest rates.
In New York, the dollar was quoted at 83.91 yen, up from 83.45 late Tuesday. It was also changing hands in New York at 1.388 marks, up from 1.382.
Overseas markets were mixed. In Tokyo, the 225-share Nikkei average shed 131.73 points to close at 16,826.49. Frankfurt’s DAX average closed at 2,059.06, up 19.47 points, and London’s Financial Times 100-share average gained 28.9 points to close at 3,290.1.
