Bond Yields Tumble as Dow Again Hits Record

Stocks rallied and Treasury bond yields tumbled Wednesday as investors continued to bet that the Federal Reserve is finished tightening credit for 1999.

But the markets’ new euphoria may be the Fed’s worst nightmare, some analysts say, if the result is to further pump up economic activity.

The Dow Jones industrial average gained 42.74 points, or 0.4%, to a record 11,326.04, recovering from an early dip.

The Nasdaq composite surged 1.9% to 2,805.60, nearing its record close of 2,864.48 set July 16.

Significantly, New York Stock Exchange volume jumped to 865 million shares, the highest in three weeks. Winners topped losers by 16 to 14 on the Big Board.

Stocks were fueled by a fresh wave of buying in the Treasury bond market, driving the yield on the bellwether 30-year T-bond down to 5.85% from 5.93% on Tuesday and the lowest since May 31. Shorter-term yields also fell. The yield on five-year T-notes, which was as high as 6.03% on Aug. 10, has tumbled to 5.61%.

And the Treasury sold new two-year notes Wednesday at a yield of 5.56%. That is just 0.31 point above the Fed’s new target rate for the federal funds rate, its key short-term interest rate.

The Fed raised that rate to 5.25% on Tuesday from 5%. But because the central bank also appeared to signal that its latest rate increase may be its last for the time being, investors are more willing to lock in bond yields now, analysts said.

Indeed, Wednesday’s bond rally occurred despite robust new data on the economy.

“The Fed is probably done for the year,” said Robert Giordano, who manages about $1 billion at Bank Leumi Trust Co. in New York. “There’s certainly room for bonds to do better”--meaning lower yields.

In the stock market, meanwhile, “people were looking for an excuse to buy, and the Fed provided it,” said Richard A. Dickson, a technical analyst at Scott & Stringfellow in Richmond, Va. “It’s onward and upward.”

But as stock prices resurge and bond yields fall, the net result could be another boost for the economy.

The “wealth effect” of rising stock prices could encourage consumers to spend more. And lower bond yields could mean lower mortgage rates, helping the housing market--which has only recently begun to slow.

Gail Dudack, chief equity strategist at Warburg Dillon Read, noted that a continuing barrage of strong economic reports could resurrect fears that business activity is overheating--and that the Fed will thus be forced to raise interest rates again.

A key report will be the August employment report, due Sept. 2.

“If labor markets still appear tight, the debate on Fed policy is likely to begin anew,” Dudack said.

Among Wednesday’s highlights:

* Shares of major consumer growth stocks rallied on hopes that interest rates will stabilize as the global economy continues to advance.

Coca-Cola gained $2.06 to $61.31, Procter & Gamble jumped $2.38 to $102.63, McDonald’s added $1.69 to $42.75 and Johnson & Johnson surged $2.56 to $105.75.

* Leading tech stocks soared, led by Microsoft, up $3.13 to $95.31; Sun Microsystems, up $2.31 to $76.31; and Dell, up $2.63 to $49.

Among Internet-related shares, EBay soared $10.13 to $129, Yahoo gained $5.63 to $158.56 and Amazon.com shot up $12.81 to $132.88.

* Commodity-related stocks were hurt as oil prices were hit by profit taking. Near-term oil futures in New York slid 89 cents to $20.58 a barrel.

Also, gasoline futures fell more than 3% after the release of an industry report indicating that demand in the U.S. is dropping off at the end of the annual vacation season.

In the energy sector, BP Amoco fell $2 to $114.31, and Halliburton lost $1.50 to $45.

* Lumber stocks dived on worries about the recent slide in wood prices. Weyerhaeuser sank $3.88 to $58.31.

* Gold stocks also were lower as gold futures fell to a new 20-year low, ending at $253 an ounce.

* Bank shares were mostly lower as Bank One plunged $12.63 to $43 after warning of lower earnings for its credit card unit.

But other interest-rate-sensitive stocks rocketed, including mortgage firms Fannie Mae, up $3.31 to $68.63, and Countrywide Credit, up $1.06 to $36.56.

Among home builders, Kaufman & Broad gained 56 cents to $22.13, and Pulte jumped $1.44 to $23.81.

European and Latin American markets were mostly higher in the wake of the U.S. central bank’s rate hike.

Market Roundup, C10

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Round Trip?

Treasury bond yields continued to sink on Wednesday, reaching their lowest levels in three months, in part reflecting hopes that the Federal Reserve won’t raise short-term rates further. Weekly closes and latest for the 30-year T-bond yield:

Wednesday: 5.85%

Source: Bloomberg News