Slow Trading Leaves Stocks Lower; Bond Yields Edge Up

Stocks drifted lower Monday in quiet summer trading, pausing from a powerful four-session rally as bond yields edged higher before this week’s big auction of new U.S. Treasury debt.

The Dow Jones industrial average slipped 5.55 points to 5,674.28 after an early rally to just under the 5,700 mark.

The blue-chip Dow had rocketed 207 points last week--nearly erasing July’s steep losses--as bond yields plummeted in the wake of economic data suggesting that growth is slowing.

But on Monday the bond rally stalled. The yield on the benchmark 30-year Treasury bond, which sank to a three-month low of 6.74% on Friday, inched up to 6.76%. Traders cited concerns about this week’s sale of $39 billion in new Treasury notes and bonds, which begins today with the auction of three-year notes.

“The [sale] is fairly large, but it’s not expected to upset the bond market too much,” said Dan Ascani, president of Global Market Strategists in Gainesville, Ga.

Peter Van Dyke, who manages $2.8 billion in bond mutual funds for T. Rowe Price Associates in Baltimore, said that after the market digests this week’s bond offerings, the 30-year T-bond yield “could take a run at 6.5%” if investors rush to lock in yields on the assumption that the economy will continue to slow.

Last week’s economic data, including key reports on July manufacturing activity and job growth, appeared to significantly reduce chances that the Federal Reserve Board will feel compelled to boost short-term interest rates to slow the economy. The Fed meets Aug. 20.

For the stock market, the interruption of bonds’ rally was enough to give some investors pause. But declining issues had only a narrow edge over winners on the New York Stock Exchange and Nasdaq.

Trading volume on the NYSE shrank to 307 million shares, typically quiet for a summer Monday. Among broader indexes, the Nasdaq composite fell 4.39 points to 1,120.53 and the Standard & Poor’s 500 slipped 2.26 points to 660.23.

Analysts said the late-day retreat came as well-known market analyst Elaine Garzarelli, who recently warned that stocks could decline much more sharply than the 10% pullback in the Dow in July, told investors on cable channel CNBC to use stocks’ latest rally as a “selling opportunity.”

Among Monday’s highlights:

* The Dow was hurt by profit taking in some of the stocks up the most lately, including Boeing, down 2 1/8 to 89 1/2, and Philip Morris, off 1 5/8 to 105.

* Merger activity got some investors’ attention. PacifiCare Health Systems’ decision to buy rival HMO FHP International sent their shares soaring, with PacifiCare Class A gaining 3 to 71 3/4 and FHP leaping 7 3/8 to 35 1/4.

Other HMOs gaining on the news included United Healthcare, up 1 1/4 to 36 3/8; Oxford Health, up 2 1/4 to 39 7/8; Wellpoint Health, up 1 3/8 to 27 5/8; and Health Systems, up 1 7/8 to 23 1/4.

* Shares of Ford slipped 1/4 to 33 5/8 after it said sales in July were off slightly. Rivals Chrysler, up 1/2 to 29 7/8, and GM, up 3/8 to 50 7/8, last week reported mixed July sales.

* EZ Communications shares soared 9 5/8 to 42 1/8 after the TV and radio station operator said it agreed to be purchased by American Radio Systems for $456 million. American Radio fell 3 to 36 1/2.

* Brokerage stocks were broadly lower after last week’s rally. Morgan Stanley sank 3 to 51 1/4 and Dean Witter lost 2 5/8 to 53 3/8.

In commodity trading, grain prices fell again on forecasts for better weather in the Midwest.

Amid fresh tensions between the United States and Iran, gold rose for a fourth straight day and closed at two-month highs, with near-term futures adding $1.80 to $389.40 an ounce.

Market Roundup, D8