FINANCIAL MARKETS : Rate Worries Take Toll on Stocks, Bonds

U.S. stocks fell for a third day after fresh reports showing the economy is rebounding pushed bond yields up again.

Continued selling of key technology stocks also cast gloom over the market.

A big gain in shares of Walt Disney helped limit the Dow Jones industrial average’s loss to 8.10 points. It closed at 4,700.37.

The Dow had been down more than 30 points early in the day.

But losers still outnumbered winners by 13 to 9 on the New York Stock Exchange in active trading, and all major stock indexes closed lower.

The Standard & Poor’s 500 index, which was down as much as 5.39 points early on, recovered to close down 2.42 points at 559.64.

Analysts said the market’s selloff was triggered by a jump in bond yields, after several economic reports pointed to a revival in business activity.

Most striking was the National Assn. of Purchasing Management’s report that its index of manufacturing activity rose to a larger-than-expected 50.5 in July from 45.7 the month before.

Bond traders, fearing that the economy’s strength will preclude any additional interest rate cuts by the Federal Reserve Board, sent the yield on the 30-year Treasury bond up to 6.90% from 6.84% Monday.

Shorter-term yields also rose, but yields in general closed below their highs for the day.

Still, “too many people have been in the camp that rates and inflation are going lower,” said John Rogers, chief investment officer at Ariel Capital Management, which manages $1.6 billion. “We’ve become a believer that ultimately rates are going to go higher.”

Wall Street is also concerned by continued selling of technology stocks, which had led this year’s tremendous rally. After a bout of profit taking two weeks ago, the stocks recovered early last week, only to begin declining again last Friday.

The good news in the market remains heavy takeover activity, which provides underlying support for stocks, analysts say.

On Monday, Disney announced a $19-billion bid for Capital Cities/ABC. On Tuesday, Westinghouse Electric made its long-awaited offer for CBS.

“The Disney-Cap Cities deal is a merger with a premium,” said Alan Ackerman, executive vice president at Reich & Co. “That’s going to bring a premium to other media mergers.”

Among Tuesday’s highlights:

* Disney jumped 2 7/8 to 61 1/2, continuing to benefit from investor excitement about its merger with Cap Cities. Cap Cities shares rose 3 1/4 to 119 1/2.

Meanwhile, CBS closed unchanged at 77 3/4. The Westinghouse bid had been anticipated. Westinghouse rose 1 1/4 to 14 7/8 in late trading, but analysts said they were unsure whether that reflected true optimism about the company’s purchase of CBS or technical trading ahead of the merger announcement, which came in late afternoon.

* Declines in technology leaders Intel and Microsoft helped pushed down the Nasdaq composite index, which closed at 991.11, down 10.10 points.

Intel dropped 1 3/4 to 63 1/4 and Microsoft lost 1 to 89 1/2.

Other tech losers included Apple, down 1 1/2 to 43 1/2; Hewlett-Packard, down 2 1/8 to 75 3/4; Sun Microsystems, off 2 1/2 to 45 5/8; Dell, down 1 3/8 to 63 5/8; Texas Instruments, off 5 to 151 1/4; EMC, down 2 1/4 to 20 5/8, and Cirrus Logic, down 1 3/4 to 44 1/4.

* On the plus side, Digital Equipment gained 1 7/8 to 40 1/4 as it reported earnings that generally met analysts’ forecasts.

And among initial public offerings, On Technology soared 3 3/8 to 18 3/8 and Jayhawk Acceptance gained 4 3/8 to 14 3/8.

* Media stocks were mixed. Time Warner added 1/2 to 43 3/8 and Turner Broadcasting A gained 1 1/4 to 23, but Viacom A lost 3/8 to 50 1/2.

* Learning Co.’s shares shot up 14 1/2 to close at 53 1/2 after receiving a takeover bid from Broderbund, which fell 3 15/32 to 68 1/32. The two companies make educational software.

In foreign trading, Tokyo’s key Nikkei index ended sharply lower as arbitrage-linked selling and profit taking by dealers emerged in late trading. The Nikkei ended down 318.96 points at 16,358.57.

In Mexico City, the Bolsa index edged up 4.32 points to 2,379.49.

Elsewhere, Hurricane Erin churned commodity markets, sending lumber prices jumping as lumberyards in the South bought supplies to rebuild after the storm passes.

Meanwhile, natural gas prices plunged following forecasts that the winds will bypass offshore rigs in the Gulf of Mexico.