FINANCIAL MARKETS : Bond Yields Plunge, Stocks Gain on News of Slowing Economy
Treasury bond yields plummeted Tuesday as traders and investors embraced fresh evidence that the economy is slowing to a pace unlikely to arouse inflationary pressures. The news also sent stocks higher, pushing several indexes to record highs.
Because of reports that retail sales were surprisingly slow and May inflation was tame, many market players now believe the Federal Reserve Board may seek to boost the economy by lowering rates at its next policy-making meeting in July. Such a move would boost the value of fixed-return securities now in circulation.
The yield of the Treasury’s main 30-year bond tumbled to 6.54% from 6.70% on Monday. Yields on shorter-term bills and bonds also fell.
The bond price surge marked the latest volatility in what analysts describe as a conflicted fixed-income market, with participants wavering over possible cuts in interest rates.
Last week, expectations for a rate cut were deflated by comments by Fed Chairman Alan Greenspan that suggested the economy was not headed for a prolonged downturn.
“You’re in a whipsaw type of atmosphere,” said Eric Herndon, a bond trader at Griffin, Kubik, Stephens & Thompson Inc. in Chicago.
In the equity markets, the Dow Jones industrial average surged 38.05 points to 4,484.51, just shy of its previous closing record of 4,485.20 set a week ago.
“Profits count,” said Larry Wachtel, a market analyst at Prudential Securities, “but rates rule the roost.”
Broad market indexes climbed to record levels, as computer stocks rose in response to a report of robust semiconductor orders.
The Nasdaq composite index rose 6.25 points to 894.23, topping its record closing of 887.98 set Monday. The Standard & Poor’s 500-stock index advanced 5.17 to 536.05 points, above its record of 535.60 set the previous Monday. The NYSE’s composite index rose 2.62 points to 288.18, edging above its previous record of 288.05.
On the New York Stock Exchange, advancing issues led decliners by about 11 to 5. Big Board volume came to 339.68 million shares as of 4 p.m., up from 287.83 million on Monday.
Among Tuesday’s market highlights:
* Computer stocks continued to lead the market higher after the Semiconductor Industry Assn. said late Monday that its book-to-bill ratio rose to 1.22 in May, compared to analysts’ expectations of 1.18 and an April reading of 1.17.
A ratio of 1.22 means that for every $100 worth of products shipped, chip makers received $122 worth of new orders. Because of the growing importance of computers in the economy, the book-to-bill ratio has come to be viewed as an important economic indicator.
High-profile chip stocks, which have been market leaders for several months, initially rallied on the report, but some backed off as the day progressed. Intel finished down 9/16 at 11.
Chip stocks gaining on the Big Board included Cypress Technology, up 1/2 to 37 7/8; Micron, up 3/8 to 48 1/8, and Motorola, which rose 5/8 to 61.
IBM added 1 1/2 to 91 3/4, while Digital Equipment rose 1 1/8 to 43 3/4.
* Banking and utility stocks rose as interest rates fell. Citicorp climbed 2 7/8 to 55 7/8.
* Airline stocks rose after major carriers indicated that fares will remain firm, despite cuts for the July 4 holiday. Delta surged 3 5/8 to 73 3/8. The run in airline stocks pushed the Dow transportation index up 37.73 points, or 2.27%, to 1,700.95.
* Among other issues, ITT soared 5 5/8 to 114 7/8 after the company said it will spin off its businesses, with combined revenues of $25 billion, into three publicly held companies in one of the biggest corporate restructurings ever. Seagram rose 1 3/4 to 30 7/8 in U.S. trading. MCA, which became 80%-owned by the Canadian company on June 5, entered a long-term alliance with Steven Spielberg’s DreamWorks SKG studio in which it will get distribution rights to DreamWorks movies and other products. Sun Co. shed 2 1/8 to 29 1/8 after the company’s restructuring plan got negative reviews on Wall Street.
* In overseas stock markets, the Nikkei 225-share average in Tokyo fell 1.44% in overnight trading, while Frankfurt’s DAX index lost 0.21%. But the FTSE-100 index in London added 0.10%.
