FINANCIAL MARKETS : Inflation Fears Send Yields Up; Stocks Mixed

Blue-chip stocks surrendered early gains to close modestly lower Wednesday, after the bond market reversed its recent rally on new inflation jitters.

But smaller stocks rose thanks to strength in the technology and telecommunications sectors.

On Wall Street, the Dow industrials dropped 43.72 points to 5,626.88 in a late sell-off traced to bonds’ woes.

Bond yields jumped late in the day as traders reacted to Federal Reserve Board Chairman Alan Greenspan’s generally upbeat comments on the economy.

Greenspan, testifying before a House committee, said the economic expansion has “staying power” and inflation is under control. But he frightened some bond traders by saying that as the job market improves, wages are showing signs of rising more quickly.

Faster wage growth, while naturally celebrated by workers, could produce inflationary pressures in the economy and thus push up interest rates.

In late trading, the yield on the bellwether 30-year Treasury bond zoomed from 6.58% on Tuesday to 6.68%, the highest since March 19. Shorter-term yields also rose.

Some analysts argue that the bond market continues to worry excessively about inflation for no good reason. “We have had no real indication that the economy has broken out of a low-inflation-rate pattern,” said Thom Brown, managing director of Rutherford Brown & Catherwood.

Bonds were also spooked Wednesday by rumors, later denied, that Newport Beach-based money manager Pacific Investment Management Co. sold more than $1 billion of bonds.

William P. Thompson, Pimco’s chief executive, said, “We are actually buying securities today for several new clients and our fundamental view of the market has not changed.”

The speculation about Pimco rattled traders because the firm is one of the nation’s largest bond managers, and it has made a large bet that long-term bond yields are headed lower--not higher--from current levels.

In the stock market, bonds’ troubles triggered enough selling in blue chips to give losers a 13-10 edge over winners on the Big Board, on below-average volume.

But smaller stocks were mostly higher, as many technology issues continued to rebound from recent declines. The Nasdaq composite index rose 5.53 points to 1,093.88.

Analysts say the next few weeks could be a tug of war between investors’ concerns about weaker near-term corporate earnings and expectations for improved earnings later in the year, if the economy stays on track.

Among Wednesday’s highlights:

* Apple Computer led tech issues higher, rising 1 3/8 to 25 1/4 after saying it will take a huge write-off. Investors apparently hope the write-off will clear the decks for the company to resume growth.

Other tech gainers included Cabletron Systems, up 3 to 69 1/2; Digital Equipment, up 1 3/4 to 52; BMC Software, up 1 3/8 to 54 5/8; and IBM, up 1/2 to 111 1/4.

* In the telecom area, Qualcomm gained 1 to 41 3/8, Newbridge Networks jumped 4 to 53 1/2 and Tellabs was up 15/16 to 48 1/4.

* Many energy stocks also continued to climb. Louisiana Land rose 2 to 48 3/4, Sonat soared 1 5/8 to 37 1/8 and Enserch was up 1 to 16 1/2.

* Wells Fargo surged 6 5/8 to 257. It is expected to soon announce the sale of 61 branches it must shed for its merger with First Interstate.

* On the downside, classic consumer growth stocks were broadly lower in what some analysts called end-of-quarter profit taking. Eli Lilly lost 1 5/8 to 65 3/8, Hershey Foods fell 1 1/4 to 76 7/8 and Procter & Gamble dropped 1 5/8 to 85 3/4.

Overseas, Tokyo’s Nikkei-225 stock average closed at a 21-month high, up 1.5% to 21,329.98, buoyed by fresh demand from institutional investors and persistent buying by foreigners.