Yields Close Above 6%, First Time in a Year; Dow Loses 75
The yield on the benchmark 30-year U.S. Treasury bond closed above 6% on Wednesday for the first time in more than a year, adding to Wall Street’s pre-summer malaise but not triggering a stock market rout, as some had feared.
The Dow Jones industrial average fell 75.35 points to 10,690.29, on top of a 143.74-point drop Tuesday, when the 30-year yield briefly touched 6% during the trading day.
Trading was light Wednesday, with 653 million shares changing hands on the New York Stock Exchange.
The Nasdaq composite index, buoyed by optimistic projections for computer and semiconductor sales, rose 44.79 points, or 1.8%, to 2,519.35, nearly regaining the previous day’s loss.
Big Nasdaq-traded technology shares led the way, with Microsoft up $2.94 to close at $82.31, Intel up $1.44 at $53.13 and Dell Computer up $1.50 at $35.50. On the NYSE, Texas Instruments rose $6.38 to close at $123.38.
Interest rates still face upward pressure as the economy surges and inflation picks up. The Federal Reserve is likely to raise the short-term rates it controls when committee members meet at the end of the month, market watchers said.
Experts believe the bond market has already “priced in” at least one 0.25-percentage point Fed rate hike this month, with a hike in August also a strong possibility.
Those expectations will be affected by several upcoming economic indicators, particularly the consumer price index for May, to be released next week.
At some point, analysts said, rising interest rates could cause the stock market to tumble dramatically. What makes Wall Street nervous is that nobody knows where that point is.
The long bond closed with a yield of 6.02% on Wednesday, the highest since May 1998.
“As long as corporate earnings are reasonably strong, we could tolerate 6.25%,” said Robert W. Bissell, chief investment officer at Wells Capital Management in Los Angeles.
But weakening profits combined with rising bond yields would be harder to tolerate, he said.
For bond market players, Wednesday’s close above 6% was not a major event because earlier-issued 30-year T-bonds have been trading at yields above 6.25%, noted William H. Gross, chief executive of bond specialist Pacific Investment Management Co. in Newport Beach.
The benchmark bond is the “on-the-run,” or most recently issued, one. Investors will pay more for it--and its yield, which moves in the opposite direction from price, will be lower--because it is more liquid or easily traded than older issues.
To gauge inflation expectations, Gross looks to the new inflation-protected T-bonds, now yielding about 3.90%. That is 2.35 percentage points lower than what off-the-run 30-year bonds are yielding, he said. That means investors are expecting annual inflation of about 2.35%, which would represent a sizable upturn, Gross said.
The key for the markets during the next few months is whether those expectations settle back down to the 2% range or keep rising to 3% or more. With most of the globe still experiencing economic weakness, Gross said the former scenario is more likely.
Even if yields do back off a bit, they still represent a significant danger to the stock market, experts said.
In less than five months, the yield on the 30-year bond has leaped nearly a full percentage point, from 5.09% on Jan. 29, noted William T. Lloyd, a bond market strategist at Barclay’s Capital Group in New York.
During the same period, the Dow has gained 14%, although it is down a bit from its May 13 peak of 11,107.19. If investors see stocks as overpriced, they could flee for the safety--and high rates--of Treasuries, he said.
The dollar fell against the yen for a second day on statements by Japanese officials that Japan’s economy appears to be improving. In New York, it rose to 118.93 yen, from 118.88 on Tuesday.
The euro, meanwhile, was little changed at $1.0465. The European common currency had surged more than 1% on Tuesday because of a strong economic growth report from Germany.
European officials have tried to talk the euro upward this week, after the currency hit $1.0258 on Monday--its lowest level since its introduction in January.
Among Wednesday’s highlights:
* Manhattan Beach-based Skechers USA (ticker: SKX), which was priced at $11, skidded to $10.63 in its debut. The shoe company’s initial public offering continued a trend of flat IPOs from companies not tied to the Internet.
Other less-than-spectacular IPOs included Irvine-based Litronic (LTNX), which rose 13 cents to $11.13.
* GBC Bancorp, the Los Angeles-based holding company for General Bank, rose 31 cents to $18.06 on a jump in trading volume despite an absence of major news. More than 200,000 shares changed hands, compared with an average of fewer than 5,000 in recent days.
* Pfizer sank $6.06 to $104.94 after the Food and Drug Administration restricted the use of its antibiotic Trovan.
Market Roundup, C8
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Back Above 6%
The yield on the benchmark 30-year Treasury bond rose above 6% on Wednesday to a 13-month high as investors soured on Treasuries in anticipation of inflation reports that may boost the chances of an interest rate hike.
March 6, 1998: 6.02%
Wednesday: 6.02%
Source: Bloomberg News
