FINANCIAL MARKETS : Bond Yields Hit 15-Month Low; Dow Edges Up

Bonds staged their second-biggest rally of 1995 on Wednesday as news of a surprising drop in factory orders seemed to wipe out the last vestige of worry about interest rates’ trend.

Analysts said the government’s report that orders for durable goods sank 4% in April convinced many skeptical investors that the Federal Reserve Board’s next move will be to cut short-term interest rates--though possibly not before late summer.

On Wall Street, stocks responded positively to bonds’ rally early in the day, sold off in late trading, then rallied back to close mixed. The Dow Jones industrial average finished up 1.72 points at a record 4,438.16, narrowly edging past the previous record high of 4,437.47 set May 15.

The spotlight was on bonds for virtually the entire day, as yields plunged across the board, extending this year’s phenomenal rally.

The 30-year Treasury bond yield plummeted to close at 6.74%, down from 6.86% on Thursday and the lowest since February, 1994--the month the Fed began raising short-term interest rates to restrain the economy.

The T-bond yield now has dropped 1.4 points since peaking near 8.15% last November.

Shorter-term yields also tumbled Wednesday. The three-year T-note yield sank to 6.07% from 6.22% on Tuesday, and the six-month T-bill yield dropped to 5.88% from 5.96%.

Bond pros say the fact that yields on Treasury securities of two years and under are now below 6%--which is the “federal funds” rate, the Fed’s benchmark short-term rate--clearly shows that the market believes the Fed will cut that rate sooner rather than later.

The durable-goods report “reinforces the general idea” that the Fed is poised to reduce rates to keep the economy from sliding into recession, said Neil DeSarno, trader at S.G. Warburg in New York.

At the very least, “the market is sending the message that there’s no fear of the Fed guiding rates higher,” said Dan Seto, economist at Nikko Securities.

Some economists believe longer-term bond yields, in particular, can continue to move lower as long as the economy remains soft.

But the stock market’s next move isn’t clear, some Wall Streeters say.

Stocks have rocketed this year with declining interest rates, but investors’ assumption has been that the economy was slowing to a moderate pace--not falling into recession.

That assumption may be questioned if additional economic data shows business activity going into a tailspin.

Recession worries may have fueled the bout of profit taking that hit late Wednesday, pushing the Dow to a 30-point loss before it recovered in the final minutes.

In the broader market, advancing issues outnumbered decliners by a slim 7-6 margin on the Big Board, where trading volume ballooned to 394 million shares.

Other indexes were mixed. The Standard & Poor’s 500-stock index added 0.02 point to 528.61, a record high. But the Nasdaq composite slipped 1.66 points to 877.98.

Meanwhile, the dollar ended mixed after the weaker-than-expected durable-goods report. It closed in New York at 87.23 Japanese yen, up from 87.16 on Tuesday, and at 1.440 German marks, down from 1.443.

Among Wednesday’s highlights:

* Some industrial stocks lost ground on economic worries. Bearings sank 7/8 to 28 1/4, Acme Cleveland plunged 2 1/4 to 25 5/8, Emerson Electric fell 3/4 to 67 3/4 and Eaton slumped 1 1/4 to 58 3/4.

Auto issues were also weak. Chrysler fell 1/2 to 42 1/8, Ford lost 5/8 to 28 7/8 and GM dropped 7/8 to 46 3/8.

* Railroad and airline stocks, also sensitive to economic swings, gave ground. CSX lost 1 1/8 to 75 1/2, Federal Express slid 1 1/4 to 60 1/2 and Delta Air Lines fell 7/8 to 64 5/8.

* Technology stocks ended broadly lower. IBM fell 1 1/8 to 96 1/8, Parametric sank 3 to 44 1/2, Dell Computer lost 1 3/8 to 52 3/4 and Micron Technology fell 2 5/8 to 47.

* On the upside, many financial stocks gained as interest rates plunged. Citicorp surged 1 1/8 to 52 3/4, Bear Stearns gained 3/4 to 20 3/4, Bank of New York rose 1 3/4 to 41 and SunAmerica rose 7/8 to 53 1/8.

* Drug stocks also returned to favor. Merck jumped 1 3/4 to 44 1/2, Warner Lambert added 7/8 to 80 1/2 and Pfizer advanced 1 1/2 to 85 7/8.

Overseas markets were mixed. 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, in part taking their cue from Wall Street’s Tuesday rally.

Tokyo’s 225-share Nikkei average climbed 54.60 points to 15,970.75.

But Mexico’s Bolsa index, continuing its recent volatility, tumbled 52.07 points, or 2.5%, to end at 2,044.83.