FINANCIAL MARKETS : Bonds Rally as Yields Tumble; Dow Edges Up
Treasury bonds rallied as yields plunged to 15-month lows on Wednesday after a surprising drop in factory orders revived speculation that the Federal Reserve Board may lower interest rates to thwart an economic recession.
Stocks, however, gave up a substantial lead to finish barely higher as investors ignored the sharply lower interest rates and instead sold their equity holdings to lock in profits.
At the close, the yield on the benchmark 30-year bond plummeted to 6.74%, the lowest closing yield since February, 1994. On Tuesday, the bond ended at 6.86%. The long bond’s price, which moves in the opposite direction, jumped 1 23/32 points, or $17.19 per $1,000 in face value.
Bond prices soared after the Commerce Department reported that orders for big-ticket durable goods fell a surprising 4% in April, the third consecutive month of lower orders and the biggest drop in 3 1/2 years.
The report reinforced a bond market view that the U.S. economy is slowing sharply and that it may prompt the central bank to ease interest rates to keep the economy from slipping into recession.
Bondholders welcome news of slow economic growth because it usually suggests there will be less inflation, which erodes the value of securities that pay fixed interest rates over time. Should the Fed lower rates, that would also boost the value of existing fixed-income securities because they would pay relatively higher returns than newly issued ones.
“The market is sending the message that there’s no fear of the Fed guiding rates higher, and it may even guide rates lower because the economy is softening,” said Dan Seto, economist at Nikko Securities International Co.
Reflecting the sentiment, the federal funds rate--the interest on overnight loans between banks--dropped to a closing quote of 5.125%, down from 5.938% Tuesday.
On Wall Street, stocks followed bonds higher on the thinking e that companies should benefit from lower interest rates. But investors quickly began to worry that the economy may be declining enough to drag corporate earnings down as well.
The Dow Jones industrial average ended up 1.72 points at 4,438.16, squeaking past its all-time high set last Monday to another record. Over the last three trading sessions, the Dow average has recouped the 89-point loss it suffered last week amid intensifying fear that the economy is slowing too much.
In the broader market, advancing issues outnumbered decliners by a slim 7-6 margin on the New York Stock Exchange, where volume was heavy at 393.86 million shares, up from 362.68 million on Tuesday.
The Standard & Poor’s 500-stock index rose 0.02 point to 528.61, topping its all-time high set on Tuesday. The NYSE’s composite index rose 0.18 points to 283.98. The American Stock Exchange market value index added 0.09 points to 491.77. But the Nasdaq composite index, which is heavily laden with technology issues, declined 1.66 points to close at 877.98.
The dollar, meanwhile, ended mostly lower Wednesday after the weaker-than-expected durable goods report. It closed in New York at 87.23 Japanese yen, up from 87.16 late Tuesday, and at 1.440 German marks, down from 1.443.
Among Wednesday’s highlights:
* Auto stocks dropped sharply on the bearish economic news and amid fear about the financial repercussions of a huge recall announced by car makers on Tuesday to correct defective seat belts. Chrysler fell 1/2 to 42 1/8. Ford lost 5/8 to 28 7/8, and General Motors dropped 7/8 to 46 3/8.
* Computer stocks buckled in the afternoon as investors moved those issues onto their “sell” lists. IBM fell 1 1/8 to 96 1/8, Compaq declined 1/2 to 41 3/8, Hewlett-Packard slid 5/8 to 70 1/8 and Dell Computer lost 1 3/8 to 52 3/4. Micron Technology fell 2 5/8 to 47, Intel lost 1/4 to 116 1/4, Applied Materials was off 1 at 83 1/4 and Texas Instruments sank 5/8 to 123 3/8.
* One bright spot in the market was drug stocks, which tend to perform well in times of economic decline. Merck rose 1 3/4 to 44 1/2; Warner Lambert finished 7/8 higher at 80 1/2.
* Financial stocks also rose with the dramatic drop in interest rates. Citicorp surged 1 1/8 to 52 3/4. Brokerage Bear Stearns gained 3/4 to 20 3/4. Bank of New York rose 1 3/4 to 41. First Financial Management gained 1 3/8 to 73.
Overseas markets were mixed. Mexico’s Bolsa index fell 52.07 points to end at 2,044.83.
In Frankfurt, the 30-share DAX closed up 24.77 points at 2,105.12 and London’s FTSE-100 average rose 35.5 points to 3,327.3. Tokyo’s 225-share Nikkei average climbed 54.60 points to 15,970.75.
