FINANCIAL MARKETS : Bond Yields Soar as Hope of Fed Cut Fades
Bond yields soared Wednesday, pushing prices sharply lower as comments by Federal Reserve Board Chairman Alan Greenspan cast doubt on prospects for another cut in interest rates any time soon.
The selloff capped four days of steep losses and rippled through Wall Street, sending stock prices into a wild tailspin. At one point, the Dow Jones industrial average was down more than 130 points.
Driving the selloff was testimony by Greenspan before Congress that the economy has passed the “point of maximum risk” of a recession. The remarks come after recent reports on jobs, retail sales and other sectors that have suggested glimmers of a recovery from this year’s economic slowdown.
“The last shred of hope for a weak economy and further Fed ease was removed in the chairman’s testimony,” said Eugene Sherman, economist at M. A. Schapiro & Co., a New York investment bank.
The selloff gained speed, spurring other sellers to rush in, as investors decided that Greenspan’s comment effectively ruled out another rate reduction at the central bank’s next policy-making meeting in August.
The market recovered somewhat by day’s end as bargain-hunters bought newly cheaper securities. At the close, the bellwether 30-year bond yield jumped to 6.86% from 6.76% on Tuesday. Its price, which moves in the opposite direction, finished down 1 11/32 point, or $13.44 per $1,000 in face value.
The rapid breach of key yield barriers signaled a clear reversal of market sentiment from the bond rally of recent months. Since last Thursday, long-term bond prices have tumbled more than 4 points as yields have soared nearly one-third percentage point.
Stocks meanwhile, plunged as investors dumped high-flying technology stocks of every description Wednesday in the heaviest trading in Wall Street history, sending the stock market into a brief free fall before closing above the day’s lows.
The Dow industrials closed at 4,628.87, down 57.41, but only after trimming a loss of more than 133 points sustained around 2 p.m. Despite the dramatic fall, the market’s best-known index still was nearly 21% above the level it held as the year began.
Declining issues outstripped advancers on the New York Stock Exchange by more than 6 to 1. Big Board volume was the third highest on record at 483.40 million shares, up sharply from the 377.16 million shares logged on Tuesday.
The extensive selloff is “one of the steepest on record. I’m sure there are other intervals in which we lost ground more sharply, but this is an abrupt change in attitudes and shows the market was deeply overbought,” said William Sullivan, director of money market research at Dean Witter Reynolds Inc.
Although profit taking kicked in with a vengeance in the high-tech sector and created a frenzy of selling, traders said the rout was fanned by Greenspan’s comments.
Among the trading highlights:
* Heavy profit taking in technology stocks came after disappointing earnings from Intel Corp. Intel lost 8 to 65 1/4 on massive trading of more than 55 million shares. The day’s trading in Intel was a record for a single stock on the Nasdaq.
* Among other high-tech losers, IBM fell 5 3/4 to 101 1/4, Microsoft fell 7 3/8 to 94 1/2 and Sun Microsystems shed 3 3/4 to 44 3/8. Motorola slid 2 5/8 to 72 7/8 and Micron Technology lost 2 5/8 to 57 3/8.
* Although computer-related shares were the most prominent losers, a wide selection of stocks took big hits. Banking and financial shares were down on the surge in interest rates, with Citicorp shares falling 3/4 to 60 3/4.
* Economically sensitive stocks, including construction-machinery makers, fell sharply. Caterpillar slid 2 1/4 to 69 1/8, even after the company reported a 37% rise in its quarterly profits.
* Auto stocks fell after Ford announced lower second-quarter earnings. Ford Motor fell 7/8 to 30 1/8, Chrysler fell 5/8 to 48 7/8 and General Motors fell 7/8 to 48 5/8.
The dollar also plunged against most major currencies Wednesday, hitting a two-month low against the German mark, in line with the selloff in the stock and bond markets.
