Surging Bond Yields Send Dow to Its 3rd Straight Loss
Stocks finished with only modest losses Thursday after recovering from a steep slide sparked by a third straight day of surging interest rates in the bond market.
The Dow Jones industrial average closed 33.33 points lower at 9,366.34, after bargain hunters rushed in and cut what had been a 166-point loss earlier in the day.
The recovery wasn’t enough, however, to prevent the Dow’s first three-session losing streak in a month.
Broader indexes also staged a partial rebound after plunging as Treasury bond yields soared, reflecting another batch of strong economic data.
The Standard & Poor’s 500 index finished down 8.39 points, or 0.7%, at 1,245.02 after sliding as much as 28 points. The technology-heavy Nasdaq composite bounced back from a 52-point loss to close 12.56 points lower, or 0.5%, at 2,326.82.
Trading volume dipped from Wednesday’s levels, which traders said was an indication that stock sellers are not panicking, even as long-term bond yields hit their highest levels since last summer.
The yield on the bellwether 30-year Treasury bond ended at 5.65%, up from 5.51% on Wednesday and the highest since Aug. 13. The yield has zoomed from 5.36% just since Monday.
Shorter-term interest rates also rocketed, with the yield on two-year T-notes hitting 5.22%, up from 5.08% on Wednesday and 4.96% a week ago.
As market yields soar, the value of older, lower-yielding bonds plunges. “People have been burned severely” in the market, said Kevin Kennedy, who helps oversee $32 billion of bonds at Citibank Global Asset Management.
With one day left to trade in February, Treasuries maturing in two years or more are on track to post their biggest monthly price losses in 19 years, according to Ryan Labs, a research firm.
Analysts said each succeeding economic report that points to stronger-than-expected U.S. growth convinces more bond investors that the Federal Reserve will be forced to tighten credit sooner rather than later, driving yields up.
Fed Gov. Laurence Meyer, speaking Thursday in London, suggested that interest rates may need to be increased to keep inflation from accelerating with the economy’s boom.
New economic data Thursday included robust reports on orders for big-ticket factory goods, unemployment claims, help-wanted ads and home resales.
But with bonds having such a bad day, why did stocks rally from their lows? Stocks may have been helped by a pullback in yields from their highs late in the day.
Still, rising interest rates are the biggest impediment for stocks going forward, most analysts say.
Over the last six months, “we’ve lost the earnings momentum that could drive stocks higher, so as a result, we’re much more dependent on other factors, like lower interest rates,” said Gail Dudack, chief equity strategist at UBS Securities.
“When you see the [Treasury] bond move above 5.5% . . . it puts a lot of pressure on equities.”
Indeed, Morgan Stanley Dean Witter investment strategist Byron Wien on Thursday cut the stock weighting in his recommended portfolio to 85% from 90%, and raised his cash weighting to 15% from 10%.
Among Thursday’s highlights:
* As bottom-fishers came in during the final hour, some sectors recovered. Financial services stocks, for example, which usually fall when interest rates rise, ended the day mixed. American Express fell as low as $104.50 but closed up 19 cents at $107.88. BankOne rose $1.19 to $52.19.
* Amazon.com soared $14.06 to $125. The top online bookseller was raised to “strong buy” from “buy” by analyst Keith E. Benjamin at BancBoston Robertson Stephens.
Also, Bidnow.com rose $2.63 to $9.44 after the online auctioneer said BDO Siedman will provide accounting, auditing, tax and consulting services for the company as it moves into its operational phase.
But MindSpring Enterprises fell $3.81 to $85.44. The Internet service provider said it will post operating losses through 2000, CNBC reported, citing Bridge News. The company said the losses are related to its acquisition of Netcom and SpryNet.
* Key tech stocks were hammered, with BMC Software down $5.44 to $41.56, Applied Materials down $4.50 to $63.75 and Micron Technology down $5.19 to $66.81.
* Some buyers turned to old-favorite growth stocks. Coca-Cola rose $1.44 to $64.25; Merck gained $1.31 to $80.81.
* Among Southland issues, Tekelec surged $2.30 to $13.36. The stock plunged earlier this month after the telecom-equipment company missed earnings estimates.
Market Roundup, C6
