Yields Tumble on Strong Auction of Treasury Notes; Stocks Rebound
A sudden plunge in long-term bond yields caused the stock market to reverse a steep decline and close mixed Wednesday, in one of the wildest days yet this year.
The Dow Jones industrial average ended up 53.11 points at 5,474.06, after tumbling nearly 80 points in the morning. The Dow had closed at a three-month low Tuesday.
Trading was heavy as some investors who sold in the morning jumped back into stocks in the afternoon, as bond yields reversed on the heels of strong demand for newly auctioned 10-year Treasury notes.
Even for investors who have become used to wide swings in stocks and bonds this year, Wednesday was a white-knuckle day. For the first time, the New York Stock Exchange was forced to activate its limits on computerized program trading for both a 50-point rise and a 50-point decline in the Dow in a single session.
Volatility “has become the norm rather than the exception” on Wall Street this year, noted Thom Brown, veteran analyst at Rutherford Brown & Catherwood.
For stocks, the volatility this year has in part reflected investors’ nervousness over rising interest rates, as the U.S. economy has grown faster than expected.
Long-term bond yields hit one-year highs late last week on fresh signs of a resilient economy. But on Wednesday, buyers suddenly rushed into bonds late in the day, after the Treasury sold $14 billion in 10-year notes at a 6.90% yield.
Demand for the notes was heavier than expected, suggesting that many institutional investors believe long-term yields are topping out.
“A yield of 6.9% on a 10-year piece of paper was viewed as a good entry point back into the bond market,” said Russ Labrasca, senior vice president at Sutro & Co. of San Francisco.
“We’ve heard of a lot of firms selling stocks and buying Treasury securities,” added Mark Sauvigne, a note trader at Chase Securities in New York. One rumor also had bond giant Pacific Investment Management Co. in Newport Beach snapping up the 10-year notes. Officials there weren’t available for comment.
Bond yields fell across the board after the auction, with the 30-year T-bond yield diving from 7.08% Tuesday to 6.95% at Wednesday’s close, the lowest in a week.
In the stock market, a wave of buying brought most indexes up from deep losses. The Standard & Poor’s 500 index gained 6.51 points to 644.77; the Nasdaq composite index of mostly smaller issues added 0.76 point to 1,183.43 after falling as low as 1,163.02.
Winners edged losers by 12 to 11 on the New York Stock Exchange, although losers topped winners by 22 to 16 on Nasdaq.
For the first time in a while, smaller issues on Nasdaq took a back seat to blue-chip shares, as some buyers went bargain hunting among big stocks.
But analysts cautioned that part of Wednesday’s rally in bonds and stocks was caused by “short covering,” as traders who had bet on a continuing decline in bond and stock prices rushed in to buy securities as prices rebounded.
Some experts fear that bond yields could continue to rise if economic growth remains above expectations, or if inflation begins to rise. However, a Federal Reserve report Wednesday termed the economy’s growth moderate and with little inflationary pressure obvious.
Among Wednesday’s highlights:
* Utilities, banks and other interest-rate-sensitive issues led stocks’ rally. The Dow utility stock index jumped 4.05 points, or 2%, to 209.47.
Among banks, NationsBank jumped 1 7/8 to 79 1/8, Wells Fargo gained 3 1/4 to 237 3/4, First Chicago NBD rose 1 3/8 to 40 3/8 and Citicorp leaped 2 to 77 1/2.
* In the Dow index, blue-chip issues attracting buyers included American Express, up 1 3/4 to 47 7/8; Eastman Kodak, up 2 to 75 7/8; DuPont, up 1 3/8 to 78 5/8; and Philip Morris, which jumped 1 3/8 to 87 3/4.
* Recently depressed drug stocks also surged. Merck gained 1 5/8 to 59 3/8, Johnson & Johnson rose 2 1/8 to 91 7/8 and Warner Lambert was up 1 3/8 to 109 1/4.
* Among new stock issues, Associates First Capital jumped 5 3/4 to 34 3/4 on its first day of trading. The Ford Motor unit now is the biggest publicly owned U.S. consumer finance company.
* Technology stocks saw relatively little interest. But U.S. Robotics surged 10 1/2 to 177 1/4 after reaching a pact to provide equipment for use in some AT&T; services. Also, C-Cube Microsystems rocketed 7 1/4 to 52 1/4. Divicom, a maker of television set-top boxes, will use C-Cube’s MPEG-2 encoder chips technology in Echostar’s new digital direct broadcast satellite system.
* Comparator Systems, the Newport Beach company whose tiny stock has been setting volume records in recent days, slumped 5/16 to 9/16 on Nasdaq as interest in the company waned.
Overseas, Tokyo’s Nikkei stock average rose 1.1%, while Frankfurt’s DAX index fell 0.3% and London’s FTSE-100 was off 0.4%.
