Stocks Decline as Yields Rise; Dow Loses 40

U.S. stocks pulled back Tuesday as rising bond yields and the collapse of a major drug merger provided excuses to nibble away at some of the market’s recent record-setting gains.

Meanwhile, Tokyo stocks fell sharply amid new concerns about the Japanese economy.

On Wall Street, the Dow Jones industrial average lost 40.10 points to close at 8,370.10, extending a minor slide since Feb. 18’s record close of 8,451.06.

Broader market indexes, several of which set new highs on Monday, also declined as bond yields rose in the wake of comments by Federal Reserve Chairman Alan Greenspan. The Nasdaq composite index, which hit a record 1,751.76 on Monday, fell 0.7% to 1,738.71.

“February has been a tremendous month, and to drive forward day after day and week after week is impossible,” said Larry Wachtel, analyst at Prudential Securities. “The fact that the pullbacks are so mild-mannered is impressive.”

Trading opened on a sour note after Monday’s late news that merger talks between British drug makers SmithKline Beecham and Glaxo Wellcome had unraveled. SmithKline’s U.S.-traded shares plunged $6 to $60, while Glaxo’s U.S.-traded shares tumbled $6.94 to $55.50.

Fed chief Greenspan then set a negative tone for the rest of trading, as he appeared to suggest in congressional testimony that the central bank sees no need to ease credit in the near term.

Bond yields had fallen by mid-January to levels that reflected strong market expectations of a cut in the Fed’s benchmark short-term interest rate, now at 5.5%.

But rates have crept higher in recent weeks, and shot up on Tuesday after Greenspan spoke. The yield on 1-year Treasury bills, for example, jumped from 5.34% Monday to 5.43% Tuesday. The yield on the 30-year T-bond rose to 5.95% from 5.90% Monday, and now is the highest since Jan. 23.

Even though yields have climbed, however, they still are at levels that suggest investors eventually expect the Fed to cut rates.

“You have the best of all situations priced into bonds right now,” said Gerald Thunelius, who manages $15 billion in bonds for Dreyfus Corp. He believes that the negative effect on the U.S. economy from Asia’s economic crisis will have to be much stronger than expected in coming months to allow yields to sink further.

The government auctioned new 2-year notes Tuesday at an average yield of 5.54%.

In the stock market, Tuesday’s losses were fairly modest, but losers still topped winners by 17 to 12 on the New York Stock Exchange.

The Tokyo market was hit harder, as the Nikkei-225 stock index sank 2.5% to 16,198, lowest since Jan. 16, after Finance Minister Hikaru Matsunaga rejected calls for additional government spending before April.

Western allies are pressuring Japan to take additional steps to boost its ailing economy.

Among Tuesday’s highlights:

* Tech stocks weakened after surging on Monday. Motorola lost $2.88 to $57.63 following a published report that the electronics giant is struggling to fix defects in its software and cellular network equipment that have already cost it a $500-million order.

Other tech losers included Intel, down $1.81 to $92.38; Dell, down $2.50 to $128.44; and Hewlett-Packard, down $1.81 to $62.56.

* Most drug stocks fell on the SmithKline/Glaxo news. Merck lost $2.69 to $127.94, American Home Products dropped $1.81 to $89.69 and Pfizer was off $1.88 to $87.50. But Warner Lambert gained $4.50 to $151.94.

Also, shares of four major drug wholesalers involved in merger deals dropped sharply as fears mounted that the Federal Trade Commission will challenge the mergers on antitrust grounds.

Bergen Brunswig fell $7.13 to $45. It is planning to merge with Cardinal Health, which tumbled $6.19 to $79.81. McKesson dropped $2.75 to $53.19. It wants to merge with AmeriSource Health, which sank $3.19 to $60.19.

* J.P. Morgan jumped $3.69 to $116 after the investment banking firm said it was planning to cut jobs and raised the possibility of merging with another brokerage house.

Market Roundup, D10