The 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 long 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 gained on the belief that President Clinton's videotaped testimony will do no further damage to his presidency.
U.S. stocks opened lower after markets across Europe and Asia declined overnight on renewed concern about conditions in Russia and Japan. Fresh doubts about a sorely needed bank reform plan, along with a credit downgrade, sent Japan's Nikkei index down 2.8% to 13,597.30, another 12-year low.
Stocks across Europe, which is thought to have more direct exposure to Russia's disintegrating economy than is the the U.S., fell hard after the ruble sank. Stocks in Spain tumbled 5.5%, while those in Italy sank 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 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 many investors observed the Jewish holiday Rosh Hashana. About 610 million shares changed hands, down from 796 million Friday.
Declining stocks topped advancing issues by a 3-2 ratio, while 522 companies dropped to 52-week lows and 56 achieved new highs.
The Treasury bond rally left experts debating when the 30-year yield might cross the psychologically important 5% threshold--and how much steam it will be able to muster after that. The long bond's price has already enjoyed an astonishing rally. Its yield stood at about 5.5% at the end of July, and most market pros are convinced it will dip below 5%. (Yield and price move in opposite directions.)
"The timing is a little hard to pin down, but I think eventually we will get there," said Mike Cloherty, bond market 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 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.
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 rate cut, as he seemed to do in congressional testimony last week, then bond yields could be headed higher in the short 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 bonds. For example, on Jan. 1, 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 bond 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 bond market. In one example, the mortgage-backed security market is vulnerable to homeowners' prepaying their loans. That means the average duration of their funds is shortened as the loans are repaid. To maintain the long-term duration of their funds, portfolio managers are buying long-term Treasuries.
Foreign markets slid after a shadow was cast on a major bank reform plan in Japan. Policymakers announced a long-awaited compromise plan Friday, including the controversial step of having the government take over some of the country's biggest banks. But they said Monday that they still disagree over key elements of the plan.
The dollar fell against the German mark on speculation that the U.S. will slash interest rates soon while Germany will maintain its rates.
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 announced that it has developed a single chip for combining television signals and computer data for cable modems.
* 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.
* American Standard sank $8.75, or 26%, to $25.25 as the maker of air conditioners said third-quarter earnings will be close to analysts' predictions of 88 cents a diluted share.
* 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.
* The American depositary receipts of Royal Philips Electronics slipped $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