Lower Bond Yields Push Stocks Higher
Stocks staged a late rebound Wednesday, sending the Nasdaq composite index to a record close, as bond yields fell and commodity prices slumped again.
The Dow Jones industrials gained 31.77 points to 5,697.48 and the Nasdaq index of mostly smaller stocks rose 5.47 points a record 1,249.15, surpassing the previous peak of 1,248.65 set May 23.
The bond market continued to set the tone for stocks. Yields pulled back from three-week highs thanks to falling commodity prices and some encouraging remarks from Federal Reserve Board officials, in advance of Friday’s key May employment report.
The yield on the Treasury’s bellwether 30-year bond dropped to 6.95% from 7% on Tuesday, although short-term yields were mostly flat.
Traders said bonds were helped by another plunge in key commodity prices, dampening inflation worries. The Commodity Research Bureau index of major commodity futures slumped 2.60 points to 247.45, near three-month lows, as grain, oil and precious-metals prices fell.
“Any kind of news suggesting inflation is indeed not a problem would cause short-covering in bonds,” noted Thom Brown, analyst at Rutherford Brown & Catherwood. Short-covering means traders who had sold borrowed bonds--expecting yields to continue rising--are rushing to buy bonds to close out their positions.
Some investors have been dumping bonds in recent weeks, pushing yields up, on concerns that the U.S. economy’s resilience will compel the Fed to tighten credit soon. Friday’s May employment report is expected to be crucial in the Fed’s deliberations as to whether the economy is growing too fast or at a non-inflationary pace.
Bond investors’ nerves were soothed Wednesday after New York Fed President William J. McDonough said he has been “encouraged” by recent reports on the pace of inflation and economic growth. Also, Kansas City Fed President Thomas Hoenig echoed that view, saying he expects growth to taper off in the second half of the year.
The stock market was flat for much of Wednesday but rallied late with bonds.
Since hitting a record 5,778.00 two weeks ago, the Dow has been pressured by profit taking as bond yields have risen.
On Wednesday, however, buyers returned and winners topped losers by 14 to 10 on the New York Stock Exchange and by 20 to 19 on Nasdaq, though trading volume overall remained subdued.
Among Wednesday’s highlights:
* Rising technology and telecom shares boosting the Nasdaq market included Microsoft, up 3 to 120 7/8; Cisco Systems, up 1 3/8 to 57 1/8; Worldcom, up 1 5/8 to 53; and Ortel, up 3 to 25 1/4.
But America Online sank 5 3/8 to 47 5/8. Montgomery Securities cut its rating to “hold” from “buy,” and research firm Cowen & Co. said it expects America Online to add 400,000 subscribers in the current quarter, down from a previous estimate of 750,000.
* Drug stocks continued to rebound. Pfizer rose 2 1/8 to 74 1/4, Merck gained 1 to 66 1/8 and Abbott Labs was up 1 1/8 to 43 7/8.
* Major bank stocks were also strong, including BankAmerica, up 2 1/2 to 79, and Citicorp, up 1 3/8 to 86 5/8.
* Hilton Hotels jumped 4 7/8 to 114 1/2 after announcing that it’s teaming up with a South African company to build a $343-million hotel and casino near Johannesburg. Meanwhile, a former major Hilton shareholder, Southeastern Asset Management, disclosed that it sold its entire 6% stake last month.
* Among new issues, Registry, which provides information technology consultants to companies with complex information systems, soared 12 to 29 in its market debut.
In commodities trading, corn and wheat fell sharply on persistent talk that China--a huge grain importer in the last year--had canceled orders for wheat and may export corn for the first time in 18 months.
At the New York Merc, oil prices fell in reaction to reports of rising U.S. inventories. July crude oil futures dropped 72 cents to $19.72 a barrel.
