Yields at 15-Month Low on Signs of Economic Slowing : Markets: Index of U.S. manufacturing shows first decline in 20 months. Stocks rally on talk of Fed rate cut.
Fresh signs of a flagging economy led to a sharp drop in yields on short-term Treasury securities Thursday, as investors bet that the Federal Reserve Board will lower interest rates to try to revive an economy that could be in danger of falling into recession.
Bond investors were particularly influenced by a report that U.S. manufacturing declined in May for the first time in 20 months. Some suggested that the Fed could lower rates as early as today if an unemployment report shows a much weaker economy.
A Fed easing would be bullish for the bond market because it would boost the value of existing Treasury securities, which would pay a relatively higher yield compared to new issues. Bond yields fall as bond prices rise.
Stocks also rallied, reaching another record as enthusiasm about lower interest rates overrode fears of an economic slowdown. But prices of long-term securities lagged, because the Fed targets short-term interest rates to carry out monetary policy.
Market strength was concentrated in Treasury bills, the shortest-term instruments. Yields on three-month bills fell to 5.65% as the discount dropped 0.13 percentage point to 5.49%. Six-month yields fell to 5.68% as the discount fell 0.13 point to 5.44%. One-year yields fell to 5.65% as the discount fell 0.12 point to 5.34%.
The benchmark 30-year bond yield fell to 6.60% from 6.64% on Wednesday. Its price rose 17/32 point, or $5.31 per $1,000 in face value.
In the day’s most dramatic sign of economic slowdown, the National Assn. of Purchasing Management said its index of manufacturing fell to 46.1% from 52% in April. A reading below 50 indicates a decline in factory activity.
The news surprised economists who were expecting slower but steady expansion at the nation’s factories.
Separately, the government reported that orders to U.S. factories plunged 1.9% in April, the biggest drop in nine months, and new claims for state unemployment insurance rose to the highest level in four months.
While some bond market strategists have speculated for weeks about a possible Fed easing, the latest economic reports increased the sentiment.
In the stock market, the Dow Jones industrial average ended 7.61 points higher at 4,472.75, having climbed back from a morning loss of 28 points and setting a record for the 33rd time this year.
In the broader market, advancing issues outnumbered decliners by more than 4 to 3 on the New York Stock Exchange, with 345.92 million shares changing hands, down from 366.24 million on Wednesday.
Two broad market indexes topped records set Wednesday. The Nasdaq composite index, also driven higher by technology issues, rose 4.24 points to 868.82.
The NYSE’s composite index rose 0.29 point to 286.73, while the Standard & Poor’s 500-stock index added 0.09 point to 533.49.
But the American Stock Exchange’s market value index fell 1.20 points to 490.90.
Among Thursday’s market highlights:
* Technology stocks bounced back after Wednesday’s session of profit taking. IBM rose 1 3/8 to 94 3/8, Intel was up 2 1/2 to 114 3/4, Micron Technology gained 1 3/4 to 46 3/8, Digital Equipment added 1 1/4 to 45 3/4 and Motorola rose 1 1/4 to 61 1/8.
* Texas Instruments rose 5 3/8 to 121 after SoundView raised its 1996 earnings estimate for the firm.
* The Dow was led higher by United Technologies, up 1 5/8 at 77 1/2, and Eastman Kodak, up 1 1/8 at 61 1/2.
* Prominent losers included Procter & Gamble, which fell 7/8 to 71, and Minnesota Mining & Manufacturing, which lost 7/8 to 59.
* Westinghouse Electric, reportedly in discussions to sell its real estate unit, rose 3/8 to 14 7/8.
Overseas stocks closed higher. In Mexico City, the Bolsa index surged 66.67 points, or 3.43%, to 2,011.80.
Tokyo’s Nikkei 225-share average gained 157.78 points to close at 15,594.57. In Europe, Frankfurt’s 30-share DAX average surged 34.21 points to 2,126.38, while London’s FTSE-100 index gained 21.2 points to 3,340.6.
The dollar fell against the German mark, hurt by the Bundesbank’s failure to lower interest rates and by the data showing the U.S economy is slowing faster than anticipated.
In New York, the dollar closed at 1.407 marks, down from 1.415 on Wednesday, and at 84.82 yen, up from 84.50.
* CRASH LANDING?
New data suggests a more drastic economic slowdown. D2
* MARKET BEAT
How market bears re coping. D3
