Stocks and Gold Sink as Yields Soar

Surging interest rates sparked a broad U.S. stock market sell-off Tuesday, but the depth of the decline was relatively modest given the bond market’s turmoil, some traders said.

In commodity trading, gold and silver prices plummeted, which analysts said was partly related to expectations that higher interest rates could make bonds more attractive than precious metals. February gold futures plunged $6.20 to $399.10 an ounce.

On Wall Street, the Dow Jones industrial average closed off 44.79 points at 5,458.53, fighting back from a loss of more than 60 points in late afternoon.

The decline was the Dow’s fourth straight, leaving the blue-chip index down 2.5% from its record high reached Feb. 12.

In the broad market, losers swamped winners by nearly 4 to 1 on the New York Stock Exchange. But trading volume was fairly modest, at 396 million shares.

Stocks’ problems began early in the day, as long-term bond yields continued their recent climb on growing investor belief that the U.S. economy isn’t as weak as had been thought in January.

When Federal Reserve Board Chairman Alan Greenspan reinforced that idea in afternoon testimony before Congress, short- and long-term bond yields alike suddenly rocketed--reflecting dashed hopes for significant new interest rate cuts by the Fed.

By the close of trading, the bellwether 30-year Treasury bond yield had reached 6.40%, up from 6.24% on Friday (markets were closed for the holiday Monday) and the highest since mid-October.

The rise in some shorter-term Treasury yields was even more dramatic. The three-year T-note, for example, ended at 5.31%, up from 5.03% on Friday.

Some analysts said the bond market’s losses represented the biggest one-day hit to bond values since May 1994--when the Fed was well along in a campaign to raise interest rates and slow the economy.

This time, traders noted that few economists expect the Fed to begin raising rates soon. But the mere thought that rate cuts may be all but finished was enough to send some bond owners fleeing for the exits.

But if the root cause of bonds’ sudden problems is belief that the economy can avoid recession and keep growing, that could be good for stocks in the longer term, analysts noted.

That thinking may have helped support prices Tuesday. The Dow’s loss, for example, amounted to less than 1%, despite the furious rise in bond yields.

Among other stock indexes, the Russell 2,000 index of smaller stocks also eased less than 1%, falling 2.68 points to 318.91. And the Nasdaq composite index, heavy with tech stocks, lost just 0.7% as some tech shares rallied despite bonds’ woes.

Still, analysts warned that a continuing jump in bond yields could weigh on stocks because any upturn in corporate profits from a stronger economy could be far off. In the near term, “I would not be surprised to see more disappointing [corporate] results beating positive surprises in the first quarter” because of the sluggish economy, said Greg Summerville, chief investment officer of $600 million-asset Kirr, Marbach & Co.

Among Tuesday’s highlights:

* Profit takers continued to hit some of the star stocks of the January rally. Eastman Kodak slumped 2 to 73 1/8, Merck fell 2 1/4 to 66 1/2, Procter & Gamble dropped 1 3/4 to 84 3/8, Johnson & Johnson slid 1 1/2 to 92 5/8 and PepsiCo lost 3/4 to 60 3/4.

Also, Unilever tumbled 5 3/8 to 139 1/8 after posting a 3% drop in profit for 1995 and warning of a continued slow-growth environment in Europe this year.

* Bank and other financial stocks were lower as interest rates rose. Wells Fargo fell 5 1/8 to 245 3/8, Bankers Trust dropped 2 1/8 to 63, J.P. Morgan lost 1 7/8 to 79 3/8, Federal Home Loan Mortgage sank 2 5/8 to 84 and Merrill Lynch was off 1 1/2 to 57 3/4.

* Electric utility stocks were also hammered by rising rates. The Dow utility index plunged 3.99 points, or 1.7%, to 225.75. Telephone utilities also tumbled.

* On the plus side, some technology stocks posted gains as investors hunted for bargains.

IBM rose 1 1/8 to 119 1/8, Seagate jumped 1 7/8 to 63 1/2, Ascend Communications gained 1 3/8 to 43 3/4 and Dell surged 2 3/8 to 32 5/8.

Some software stocks in particular were higher as investors reacted to CUC International’s surprise takeover bid for Davidson & Associates and Sierra On-Line.

* Mattel rose 1 to 35 1/4 after an analyst at Hancock Institutional Equity raised her 12-month price target to 40.

* Among new issues, Los Angeles-based Cohr closed at 13 1/4 on Nasdaq, up from its initial offering price of 9. The company serves hospitals with outsourced health-care services and supplies.

In commodities markets, gold’s drop below $400 was its first close below that level since Jan. 18.

Elsewhere, oil prices soared as refiners jumped back into a seller’s market after delaying purchases while Iraq negotiated with the United Nations over a humanitarian sale of oil. March crude oil, which expired at the close of trading, jumped $1.89 to $21.05, but traders said the big gain mostly reflected technical factors.

In foreign stock trading, Mexico’s Bolsa index sank with U.S. stocks, dropping 71.03 points to 2,904.41.

Japan’s Nikkei stock average fell 0.3%, Frankfurt’s DAX fell 0.7% and London’s FTSE-100 fell 0.8%.