The bellwether 30-year Treasury bond yield edged closer to the once-unimaginable 5% level Monday, falling as low as 5.05% and notching yet another record low despite backing off late in the day.
The T-bond's yield finished at 5.12%, down from 5.14% on Friday, after U.S. stocks staged a late-day rally that siphoned money from the fixed-income market.
The Dow Jones industrial average reversed an early 185-point slide to end up 37.59 points, or 0.5%, at 7,933.25. Stocks rebounded on the belief that President Clinton's videotaped testimony in the Monica S. Lewinsky case--released Monday--will do no further damage to his presidency, some traders said.
U.S. stocks opened lower after markets across Europe and Asia declined overnight on renewed concern about economic conditions in Russia and Japan. Fresh doubts about a sorely needed bank reform plan, along with a bond-rating downgrade, sent Japan's Nikkei-225 stock index down 2.8% to 13,597.30--a fresh 12-year low.
Stocks across Europe, which is more directly at risk from Russia's disintegrating economy than is the U.S., fell hard after the ruble sank again. Stocks in Spain tumbled 5.5%, while the Italian market dropped 5.8%, the French market slumped 3.5% and the German market gave up 4%.
But after an early sell-off, U.S. traders breathed a collective sigh of relief when the first broadcast of Clinton's grand jury testimony appeared to contain no shocking revelations.
Richard Cripps, chief market strategist at Legg Mason Inc. in Baltimore, likened the day to Sept. 11, when the stock market staged a 180-point "relief rally" after independent counsel Kenneth W. Starr's report was released on the Internet.
"To some extent, we had that in miniature" Monday, Cripps said. "That there was not anything more [incriminating] was a big psychological lift for the market."
Trading volume was below normal as the Jewish holiday Rosh Hashana kept some investors away. On the New York Stock Exchange, about 610 million shares changed hands, down from 796 million Friday.
Even though the Dow rallied back, declining stocks topped advancing issues by a 3-2 ratio on the NYSE, and other major indexes were mixed. The Russell 2,000 small-stock index eased 0.62 point to 362.64.
Meanwhile, the Treasury bond rally left experts debating when the 30-year yield--a benchmark for other long-term interest rates, including mortgage rates--might cross the psychologically important 5% threshold--and how much steam it will be able to muster after that.
The bond's price has already enjoyed an astonishing rally. Its yield stood at about 5.6% in mid-August. (Yield and price move in opposite directions.)
"The timing is a little hard to pin down, but I think eventually we will get there [below 5%]," said Mike Cloherty, bond strategist at Credit Suisse First Boston Corp. in New York.
Several forces--including the so-called flight to quality from battered overseas markets and widespread expectation of a Federal Reserve Board interest rate cut--have spurred Treasury bonds.
"Clearly, it is the place to be in terms of quality and liquidity," said Gerald Guild, chief fixed-income strategist at Advest Group in New York.
T-bonds face several hurdles in the next week. On Wednesday, Fed Chairman Alan Greenspan will testify before the Senate Budget Committee on the global economy. If he douses hope for an immediate cut in short-term rates, as he seemed to do in congressional testimony last week, bond yields could whiplash higher in the near term.
If the Fed holds interest rates steady at its policy committee meeting next week, bonds could endure another hiccup.
However, longer-term trends point to a continued rally in Treasuries. For example, in January Japan will further relax rules governing acceptable investments for the country's $9-trillion pension and profit-sharing market, Guild said.
Some estimates put the amount that could flow into the U.S. bond market at as much as 15%, or $1.35 trillion. Considering that the Treasury market totals $5.5 trillion, and that only $3.4 trillion is in public hands, that could be a big source of demand.
Technical factors also are likely to keep helping the T-bond market. In one example, the mortgage-backed security market is vulnerable to homeowners prepaying their loans.
That means many money managers will see mortgage bonds called away. To maintain the "duration" of their long-term portfolios, managers may thus need to buy more Treasury issues, which are non-callable.
Among Monday's highlights:
* Paced by semiconductor and Internet issues, technology stocks had a good day. The Merrill Lynch 100-tech-stock index climbed 1.9%. Analysts expect computer makers to report solid third-quarter sales gains in the next couple of weeks, thanks to faster machines and new software programs.
Among major tech issues, Intel rose $1.63, or 2%, to $84.63. The company's chief executive said he's optimistic that the second half of the year will remain solid. Microsoft added $2.50, or 2.4%, to $107.88 and Dell Computer tacked on $2.06, or 3.6%, to $59.94.
Among Internet names, Yahoo gained $5.88, or 6.5%, to $96.31 and Amazon.com climbed $5.81, or 7.3%, to $85.50. The top online bookseller said the video of Clinton's testimony is its best-selling item.
Broadcom rose $3.13, or 4.2%, to $78.13 after the Irvine-based company said it has developed a single chip for combining television signals and computer data for cable modems.
* Ascend Communications continued it recent resurgence, gaining $2.94, or 6.3%, to $49.50. The company is expected to report strong third-quarter earnings thanks to strong sales to phone companies.
* Insurance stocks rallied. Aetna climbed 2.8%, gaining $2 to $72.88. American International Group was up 1.9%, improving $1.50 to $80.69. Allstate moved up 2.6% by gaining $1.06 to $42.
* In the beverage sector, Coca-Cola continued to slide, losing $2.19 to $59.19. But Anheuser-Busch rose $1.69 to $57.25 and traded briefly at a new high of $58.
* American Standard sank $8.75, or 26%, to $25.25 as the maker of air conditioners warned that current-quarter earnings will be disappointing because of weaker sales to emerging markets.
Also, the American depositary receipts of Royal Philips Electronics slumped $5, or 9.8%, to $46 after the big European consumer electronics company said third-quarter earnings will show a significant decline.
Market Roundup, D14
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Yields on longer-term Treasury securities fell further on Monday to historic lows, as investors continue to flock to "safe havens." Yields on five-year T-notes and 30-year T-bonds, weekly closes and latest:
30-year T-bond Monday: 5.12%
Five-year T-note Monday: 4.52%
Source: Bloomberg News