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Jump in Yields Triggers Sell-Off in Stocks

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TIMES STAFF WRITER

The uncertainty investors feel over the direction of the stock market--and their willingness to bail quickly amid signs of trouble--was clearly displayed Wednesday as a late jump in bond yields obliterated a rally that briefly pushed blue-chip stocks to new highs.

The yield on the benchmark 30-year Treasury bond rose above the psychologically important 5.5% level--closing at 5.51%, its highest mark in more than six months. That reversed early stock market gains, including an all-time high reached briefly by the Standard & Poor’s 500-stock index about 10:40 a.m. Pacific time, and left stocks with sharp losses.

The Dow Jones industrial average slumped 144.75 points, or 1.5%, to 9,399.67, and the technology-packed Nasdaq composite index backed off 36.97 points, or 1.6%, to 2,339.38.

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The S&P;, after touching an intraday record at 1,283.91, lost 17.77 points, or 1.4%, to 1,253.41. The previous intraday high was 1,283.64 on Feb. 1.

Volume on the New York Stock Exchange remained relatively modest, with 782 million shares changing hands. But Nasdaq volume rose 2% over the previous day to 937 million shares.

After falling as low as 4.72% in early October, 30-year T-bond yields have rebounded, jumping from 5.10% a little more than three weeks ago.

The yield climbed from 5.43% on Tuesday.

The stock market has held up fairly well given the swift rise in rates, and experts point out that rates remain low in historical terms.

But some experts say stocks could be in trouble in the near-term if rates head up much further.

“It does give us a technical breakdown in bonds,” said Scott Bleier, chief investment strategist at Prime Charter Ltd., a New York investment bank. “It basically suggests the 30-year rate could pop out to the 5.70% area before it’s all said and done.”

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However, Bleier thinks the stock market’s recent weakness stems more from the continuing consolidation of its recent large gains than from any longer-term problems.

“It’s nothing to get overly excited about or nervous about,” Bleier said.

Rising bond yields threaten stocks in several ways. They make bonds slightly more attractive to potential investors, who could sell stocks to raise money to buy bonds. Also, rising yields increase borrowing costs for corporations.

A poor reception for new two-year Treasury notes sold Wednesday slammed the bond market.

Also, some experts said Federal Reserve Chairman Alan Greenspan, in his second day of congressional testimony, spooked the market by indicating that he might boost interest rates in the next several months.

But others said the central bank chief gave no indication of possible action. “The reaction of the bond market is less due to what Greenspan said than to the jittery sentiment that existed,” said Jim Paulsen, chief investment officer at Wells Capital Management.

As long as other market news is positive, investors generally take a bullish view of Greenspan’s always cryptic comments, Paulsen said. But when outside events are negative, they perceive the same comments as bearish.

The central bank lowered the target for overnight lending among banks--the federal funds rate--to 4.75% in three quarter-point moves between late September and mid-November, leaving that rate unchanged at meetings in December and earlier this month.

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But “the market is coming to the view that the next Fed move is more likely to be a tightening than an easing,” said Lou Crandall, an economist at R.H. Wrightson. Even if that move is not imminent, it makes two-year notes at 5% or lower “not particularly attractive,” Crandall said.

Yields have climbed amid a barrage of recent data depicting a far stronger economy than most experts predicted.

“The question is, is the [strong growth of the] fourth quarter an aberration, or is the economy really stronger than anyone thinks, including the bond market?” Bleier said.

Paulsen isn’t overly worried about the pickup in bond yields. He expects bonds to gyrate in a trading range, and “I think that we’re pretty close to the top” of that range, he said.

Among Wednesday’s highlights:

* Breadth was weak across the market as declining stocks outnumbered advancers by 3-2 margins on the NYSE and Nasdaq.

* Some interest rate-sensitive stocks such as banks and financial services companies were weak. American Express slid $3.94 to $107.69, while Morgan Stanley Dean Witter fell back $6.13 to $89.75. But utilities, another rate-sensitive sector, eked out a moderate gain.

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* Several semiconductor stocks gained. Texas Instruments rose $2 to $102, and Motorola improved $3 to $72.38. But other tech issues gave ground, as Intel was off $3.88 to $130.38, Cisco Systems fell $3 to $99.94, Microsoft eased $2.56 to $152.88 and Dell Computer dropped $3.81 to $83.25.

* American Greetings slumped $11.19 to $23.88, after the company said plans to boost sluggish card sales will hurt earnings near-term.

* On the bright side, airline stocks climbed strongly, after Merrill Lynch & Co. named Delta Air Lines a “focus 1 selection.”

Delta spurted $3.06 to $61. AMR, parent of American, rose $1.94 to $57.50, Northwest Airlines picked up $1.06 to $25.25, U.S. Airways rose $1.25 to $49 and Continental gained $2 to $34.50.

Also, FDX, parent of Federal Express, the world’s largest overnight delivery company, surged $3.56 to $93.44, after reaching an all-time high of $98. Schroder & Co. analyst Gary Yablon raised the company to “outperform significantly” from “perform in line.”

* Biomatrix rose $8.94 to $64.75, after the biomedical company said it earned 61 cents a share in the fourth quarter, beating the 50-cent average estimate of three analysts surveyed by First Call.

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(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Rate Rebound

The yield on the benchmark 30-year U.S. Treasury bond surpassed the closely watched 5.5% mark Wednesday, reaching its highest level since

August amid weak investor demand at the Treasury’s sale of $15 billion in two-year notes. The jump in yields triggered a sell-off in stocks. Weekly closing yields on 30-year Treasuries and latest:

Wednesday: 5.51%

Source: Bloomberg News

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MARKET ROUNDUP, C4

Bloomberg News and Assocaited Press were used in compiling this report.

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