FINANCIAL MARKETS : Japan Rumors Help Boost Bond Yields : Markets: 30-year Treasury yield soars to 6.72% from 6.61%. Stocks suffer sharpest loss in two weeks, with Dow slumping 34.58.
Treasury bond yields shot higher Friday amid speculation that the Federal Reserve Board won’t cut interest rates any time soon and that Japanese investors may shun government bonds.
The upward lurch in interest rates resulted in stocks suffering their biggest loss in two weeks as investors sold bank and brokerage shares and those of other companies whose profits are driven by rates.
By day’s end, the Treasury’s benchmark 30-year bond yield soared to 6.72% from 6.61% on Thursday. Its price, which moves inversely to yield, dropped 1 5/8 points, or $16.25 per $1,000 in face value, matching the bond price plunge of Sept. 9, 1994.
Bond market analysts said the day’s selloff was initially spurred by unsubstantiated rumors that Japan’s Ministry of Finance counseled Japanese investors to get out of U.S. Treasury issues.
Though Japanese officials denied any government effort to persuade Japanese investors to sell Treasuries, the speculation was enough to push interest rates higher.
Before the rumors on Japan hit, bond prices gained ground, then fell back slightly following a mixed report on inflation at the wholesale level. The Labor Department said the producer price index was unchanged in May.
However, the core rate, excluding the volatile food and energy components, rose 0.3%, which raised some concerns among investors that inflation may be heating up. Inflation tends to erode the value of fixed-rate investments.
Bond yields have risen for the past three days after Chairman Alan Greenspan and other Fed officials suggested that the economic slowdown will be temporary.
Bond traders interpreted the remarks as indicating that the Fed will stand pat on rates for now.
Shorter-term yields soared with long-term rates Friday. The yield on the two-year Treasury note jumped to 6.02% from 5.87% on Thursday, rising above the 6% level for the first time since May 23. The two-year note yield had fallen to 5.53% earlier this week on hopes of a Fed rate cut.
On Wall Street, the Dow Jones industrial average slid 34.58 points to close at 4,423.99. At one point, the blue-chip index lost more than 50 points before partly recovering.
Declining issues led advancers by nearly 3 to 1 on the New York Stock Exchange, where volume was moderately heavy at 327.61 million shares, up from 290.36 million on Thursday.
Broad market indexes all finished lower. The NYSE’s composite index fell 2.40 points to 284.05. The Standard & Poor’s 500-stock index slipped 4.41 points to 527.94.
The Nasdaq composite index edged 1.75 points lower to 884.38.
The Dow had risen to new highs on Monday and Tuesday, partly because investors had expected that rates would fall.
Greenspan’s comments Wednesday sparked a round of profit taking that continued for the remainder of the week.
Stocks headed lower at the opening even after the producer price report was released.
Among Friday’s highlights:
* Rate-sensitive stocks, which have risen in recent weeks as rates have dropped, came under pressure. J.P. Morgan, a Dow index component, fell 1 to 70. Chemical Banking lost 1 to 44 and Citicorp dipped 1/8 to 52 1/2.
* Utility stocks, which also usually fall when interest rates rise, moved lower. People’s Energy lost 3/4 to 26. Houston Industries dropped 5/8 to 41 7/8. The Dow utility index fell 3.30, or 1.61%, to 201.62.
Airline issues rose. AMR rose 1 3/4 to 71 1/8. Delta Air Lines picked up 1 point to close at 69.
* Continental Air Series A rose 1 1/2 to 20 1/4, and its Series B shares rose 1 1/2 to 20 1/2. S.G. Warburg raised its estimates of the airline’s 1995 and 1996 earnings and kept a “buy” rating on the issue.
* Rubbermaid fell 3 3/4 to 26 7/8 after announcing that its second-quarter earnings per share will be sharply below analysts’ mean expectations of 35 cents. The company cited higher materials costs and depressed consumer spending.
* Philip Morris fell 1 1/4 to 70 1/4. The stock declined for a second day after the New York Times reported that the cigarette maker had studied the effects of nicotine on the body, seemingly in conflict with the company’s position that cigarettes should not be regulated as a drug.
* Smith Corona fell 1/2 to 1 1/2. The typewriter maker said it is in technical default of a credit agreement, blaming a previously reported $22-million pretax restructuring charge.
Overseas, rampant bearish sentiment over the state of Japan’s financial system drove stocks sharply lower, with the key Nikkei-225 average ending at a new low for 1995. The average slumped398.12 points to 15,044.18, well below the previous low of 15,381.29 on April 3.
In Europe, London’s FTSE-100 average tumbled 43.1 points to 3,337.7, while Frankfurt’s 30-share DAX average shed 9.22 points to close at 2,121.75.
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Producer Price Index
For finished goods, seasonally adjusted figures. 1982=100
(see newspaper for chart)
1995: 127.9
Source: Labor Department
Market Roundup, D3
* LOW INFLATION
Tumbling food, energy and raw material costs left wholesale prices unchanged in May. D2
