Blue Chips Rise; Bond Yields Hit 21-Month Low

Blue-chip stocks advanced strongly Wednesday as bond yields fell to fresh 21-month lows. But smaller stocks lagged.

The Dow Jones industrial average gained 73.92 points, or 1%, to 7,724.74, finally topping its level of Oct. 24--just before it plunged 554 points on Monday, Oct. 27.

The dollar strengthened as well against the Japanese yen, while Japanese stocks tumbled overnight in Tokyo.

Some analysts said the gains in blue chips, U.S. bonds and the dollar suggested that Japanese investors were buying dollar-denominated assets again.

Tokyo shares had rallied powerfully on Monday and Tuesday after the Japanese central bank pledged to protect depositors at a failed bank, spurring hopes that the government would bail out Japan’s many troubled financial institutions.

Late Tuesday, however, Prime Minister Ryutaro Hashimoto said public funds wouldn’t be used to bolster the banking system.

That helped send the Nikkei-225 stock index plunging 5.3% to 15,842.46 on Wednesday. It was the biggest drop since the Kobe earthquake of January 1995.

Some analysts say the Japanese government may not be able to afford to do much for banks or the overall economy. Japan spent almost $600 billion between 1992 and 1996 trying to jump-start the economy with public works spending, doing more to pile up debt than spark growth.

“They are so close to dangerous levels of public indebtedness that they are boxed in,” said Peter Whelpton, president of NatWest Gartmore Investment Management Japan Ltd.

The rocky day in Japan may have benefited U.S. Treasury bonds, which rallied again as investors scurried for safer alternatives to the volatile equity market.

In fact, bond yields fell despite a report that ordinarily might have dampened the mood with inflation jitters: The government reported that construction of new homes and apartments unexpectedly rose in October, fanning worries about whether the economic pace can remain moderate enough to keep inflation under control.

Yet bonds rallied, nonetheless, with the yield on the bellwether 30-year Treasury bond falling from 6.07% Tuesday to 6.03%, its lowest finish since Feb. 13, 1996.

The dollar, in turn, rose to just shy of its highest level against the Japanese yen in five years, trading at 126.90 yen in New York, up from 126.13 on Tuesday.

The only disappointment in the U.S. market was that most smaller stocks didn’t follow blue chips higher.

While winners topped losers by 1,532 to 1,417 on the New York Stock Exchange, losers had the edge on Nasdaq, 2,252 to 1,956.

The Russell 2,000 index of smaller issues fell 1.44 points to 430.69. The Standard & Poor’s SmallCap-600 index lost 0.76 point to 178.48.

“I don’t think people have enough guts to [buy aggressively outside the blue-chip sector]. It’s a nervous market, but one where people want to be involved,” said Michael Metz, chief investment strategist at CIBC Oppenheimer.

He said portfolio managers felt pressure to remain in stocks because the market has shown considerable resilience since its Oct. 27 plunge.

Among Wednesday’s highlights:

* Blue chips leading the charge included Disney, up $2.13 to a record $91.38; Merck, up $2.19 to $92.81; Coca-Cola, up $2.38 to $62.13; Warner-Lambert, up $3.25 to $140.94; and American Express, up $2.44 to $79.

* Financial stocks gained as bond yields fell. Citicorp surged $3.13 to $125.25, Wells Fargo rose $4 to $290.88, Countrywide Credit jumped $1.38 to $38.50 and Mellon gained $2.88 to $55.63.

Also, Merrill Lynch rose $1.06 to $67.25 after agreeing to buy money manager Mercury Asset Management Group of Britain.

* Gucci Group shares rose $4.63 to $39.69, on the rumor that the Italian fashion designer could be the target of a takeover.

* On the downside, oil-services stocks continued to slide as crude oil prices declined again. Schlumberger sank $1.38 to $82.25, and Halliburton dropped $1.38 to $53.63. Energy stocks overall were mostly lower.

* Many airline stocks also fell, with UAL, parent of United, down $1 to $84 and Delta down 63 cents to $103.31. The Dow transports index was off 18.05 points, or 0.6%, to 3,092.75.

Market Roundup, D10