Jump in Yields Triggers Sell-Off in Stocks
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.
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 light, 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, bond yields have climbed steadily, jumping from 5.10% a little more than three weeks ago.
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.”
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.
Some experts said Federal Reserve Chairman Alan Greenspan, in his second day of congressional testimony, spooked the bond market by indicating that he might boost 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 between 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.
“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.
Though inflation has remained quiescent thus far, the bond market is concerned about the potential for a rise in overall prices.
The 30-year bond jumped from 5.43% on Tuesday.
“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.
Wednesday’s bond sell-off came in response to lackluster demand for two-year notes at a Treasury auction.
The notes sold at a yield of 5.009%.
Demand for the securities was the weakest it’s been in 16 years. Such short-term bonds are considered to be highly sensitive to expectations about Federal Reserve interest rate policy.
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 both the NYSE and Nasdaq.
* 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.
* 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.
* American Greetings slumped $11.19 to $23.88, after the company warned that 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. American Airlines rose $1.94 to $57.50, Northwest Airlines picked up $1.06 to $25.25, U.S. Airways Group improved $1.25 to $49 and Continental Airlines increased $2 to $34.50.
* FDX Corp., 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.
* Bluefly rose $2.56 to $12.81 as the Internet discount clothing retailer said it will be featured on No. 4 Internet search directory Infoseek’s Web site.
* InfoSpace.com rose $4.13 to $51.13. The Internet content provider said its fourth-quarter and annual losses for 1998 widened after it settled a lawsuit with a former employee. InfoSpace agreed to pay $4.5 million to settle the suit. The company had a loss of 34 cents a share for the quarter, compared with the 7-cent loss it originally reported.
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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.
