FINANCIAL MARKETS : Bonds Yields Fall; Most Stocks Gain

Treasury bonds rallied sharply Tuesday, sending yields to 14-month lows as foreign and domestic investors renewed their bond-buying spree.

In the stock market the Dow Jones industrials eased slightly, but the broader market pushed ahead to new highs. The dollar was modestly higher.

The bond market’s latest powerful advance, concentrated in longer-term issues, drove the 30-year Treasury bond yield down to 6.86% from 6.94% on Monday. The T-bond yield hasn’t been this low since March 22, 1994.

Bonds’ surge was sparked by fresh reports pointing to a slowing U.S. economy. The Federal Reserve Board said Tuesday that industrial production fell in April for the second straight month. Also, housing starts in April failed to rebound as much as expected, despite lower mortgage rates.

For the last few months investors have viewed each sign of economic deceleration as another reason to buy bonds. The assumption is that inflation will stay low as the economy weakens, allowing interest rates to slide further.

But because relatively few Wall Streeters were prepared for such a sharp drop in bond yields this year, the buying lately has become panicked, as investors rush to lock in returns. Yields have been sliding on shorter-term bonds as well: The 2-year T-note yield fell to 6.08% Tuesday from 6.14% Monday.

The bond rally also has become a global event. German bond yields fell Tuesday to their lowest levels since August and sparked a rally in other European bonds, as traders continued to speculate that Germany’s central bank may cut short-term interest rates again soon.

In the U.S. stock market, the Dow snapped a six-day winning streak, easing 2.42 points to 4,435.05. But most broad market indexes, including the NYSE composite and the Nasdaq composite, rose to record highs.

Also, the Russell 2,000 index, considered one of the most accurate indexes of smaller stocks’ movements, rose 1.24 points to 272.17, finally topping its old record high that had stood since March 18, 1994.

Gainers beat losers by better than a 3-to-2 margin on the Big Board in active trading.

But some analysts are beginning to worry that the economy may be slowing too abruptly, and that the strong corporate earnings growth of recent quarters won’t be repeated as the year wears on. Any weakness in earnings could conceivably derail stocks’ advance.

“There are second thoughts about whether this slowdown is [entirely] bullish,” said Michael Metz, analyst at Oppenheimer & Co. in New York.

For now, however, most investors still seem to be clinging to belief in a “soft landing,” whereby the economy slows enough to keep interest rates and inflation subdued, but not enough to severely crimp business prospects.

Among Tuesday’s highlights:

* Industrial issues continued to pace the advance, a sign of investors’ faith that the economy isn’t about to hit a wall. Boeing gained 3/4 to 55 5/8, Exxon added 3/4 to 71 1/4, Georgia-Pacific surged 1 1/8 to 81 5/8, Air Products & Chemicals leaped 2 1/8 to 54 1/4, Monsanto gained 1 3/8 to 84 1/2 and Navistar added 3/4 to 15 5/8.

* Some tech issues also were strong. Microsoft rocketed 3 9/16 to 84 7/8 after luring NBC-TV into an on-line deal, away from America Online, which plunged 3 1/8 to 38 5/8.

Other tech winners included Intel, up 1/2 to 108 7/8; Dell, up 7/8 to 57 1/2; and Computer Associates, up 2 7/8 to 73. But Hewlett-Packard lost 1 1/2 to 69 1/2 after reporting slower-than-expected sales growth in its most recent quarter.

* On the down side, weak earnings reports from key retailers, including Home Depot, pressured that group. Home Depot slumped 2 1/4 to 41 1/4.

Also, phone utilities sank in the wake of Pacific Telesis’ announcement that 1995 earnings will be about 10% below 1994 results, partly because of weaker-than-expected calling volume.

PacTel plunged 2 5/8 to 27, Bell Atlantic slumped 2 1/8 to 54 7/8, Southwestern Bell sank 1 1/8 to 44 3/4 and GTE dropped 1 to 32 3/4.

Overseas, Tokyo’s 225-share Nikkei average shed 220.80 points to end at 16,388.90. In Frankfurt, the DAX average finished up 23.78 points at 2,110.52, and London’s FTSE-100 average closed at 3,300.8, off 9.9 points.

Mexico’s Bolsa index closed up 23.05 points at 2071.25.