FINANCIAL MARKETS : Concern Over Interest Rates Quells Rally in Stocks, Bonds

Rallies in the stock and bond markets ran out of steam late in the session Tuesday as market players worried about the direction of interest rates and trade friction between the United States and Japan.

The Dow Jones average lost 8.64 points to 4,542.61 after advancing as much as 20 points earlier in the session. In the broader market, declining issues narrowly outnumbered advances on the New York Stock Exchange.

Other broad market indicators closed lower, led by the Nasdaq composite index, which dropped 7.42 points to 919.56. The NYSE’s composite index lost 0.73 point to 290.75, and the Standard & Poor’s 500-stock index dropped 1.70 points to 542.43.

Big Board volume totaled a heavy 346.96 million shares, up from 296.72 million in the previous session.

Stocks started the session lower, resuming the downward course of the previous two sessions that had at least temporarily halted a four-month run of news highs.

Shortly after the market opened, however, stocks shot higher, gaining as much as 20 points on a Conference Board report showing consumer faith in the economy plunged in June for the biggest monthly decline in three years.

The sharp drop had not been anticipated by economists and reflected a widespread view that the economy is slowing, economists said.

The optimism was based on sentiment that, with the economy apparently weakening, the Federal Reserve is more likely to lower rates at next week’s two-day meeting of its policy setting group, traders said.

Later in the day, however, another closely watched economic barometer, the Johnson Redbook report on national retail sales, showed sales up 1.5% in June and 7.6% above the same four weeks last year.

Wall Street also was sensitive to every rumor regarding the Geneva talks, which were taking place under the shadow of impending U.S. sanctions on $5.9 billion worth of imports of 13 Japanese luxury cars models.

Bond yields plummeted, pushing prices higher, on the consumer confidence report. The bond rally spilled into stocks and prices advanced.

However, mediocre investor response to the government’s auction of new two-year notes pushed yields higher later in the day and the benchmark 30-year bond yield fell to 6.54% from 6.55%. Its price, which moves in the opposite direction, finished up only 1/32 point, or 31 cents per $1,000 in face value.

Yields on the two-year Treasury notes fell to their lowest level in more than year. The high yield was 5.69%, down from 6.17% at the last auction on May 23.

A total of $17.75 billion in notes were sold out of bids totaling $42.3 billion.

Analysts said the results raised questions about the market’s ability to absorb another $11.5 billion in five-year Treasury notes on sale today.

Among Tuesday’s highlights:

* Technology issues were pounded, with Intel losing 2 3/8 to 62 5/8, IBM tumbling 3 1/8 to 95 1/8 and and Microsoft falling 2 7/8 to 86 7/8.

* Health maintenance organizations were also big losers, with Oxford Health Plans Inc. falling 4 1/8 to 48 1/8 and U.S. Healthcare off 1 1/8 to 31 7/8.

* PepsiCo fell 1 1/4 to 45 5/8 after Goldman Sachs removed the company from a top investment list. Meanwhile, a Teamsters strike against Pepsi appeared to widen.

* Countrywide Credit Industries, was down 7/8 to 21.

* Helene Curtis shed 2 5/8 to 28 7/8 after the company announced lower-than-expected quarterly earnings and projected results for the year will fall short of expectations.

Overseas, Tokyo’s Nikkei 225-share average plummeted 386.31 points to close at 14,759.05. In Frankfurt, the 30-share DAX average fell 8.01 points to 2,122.40, while London’s FTSE-100 average ended at 3,313.2, off 4.0 points.