Yields Hit 2-Year High but Dow Gains on Eve of Key Report
The U.S. Treasury bond market, suffering through one of its worst years ever, stumbled again on inflation fears Thursday, sending yields to two-year highs--but stocks managed to halt their two-day slide.
The Dow industrials climbed out of a hole and ended up gaining 54.45 points to 10,286.61, but other major indexes were mixed.
All Wall Street eyes are on the producer price index--the yardstick of inflation at the factory level--which the government plans to release this morning an hour before the stock market opens.
If the number is unexpectedly bad--a rise of much more than the consensus estimate of 0.5% for the month of September--it could spark new sell-offs in the bond and stock markets, analysts said.
Traders are nervous about the economy’s strength and the Federal Reserve’s warning this month that it stands ready to hike short-term interest rates again if it thinks underlying inflation pressures are still building.
Thursday’s unwelcome economic signals came from a government report of strong retail sales in September, as well as an uptick in commodity prices.
The falling price of the benchmark 30-year Treasury bond sent the yield--which moves in the opposite direction--to 6.32%, from 6.27% the day before. Bonds prices have gained on only two days in the last three weeks.
So the question in some minds Thursday wasn’t, “Why is the stock market so nervous?” but rather, “What’s keeping the stock market up?”
It was no banner day for stocks, but the mixed performance looked good in comparison with what happened to bonds and in light of two previous days of heavy losses in equities.
After dropping nearly 100 points early in the day, the Dow Jones industrial average rallied back to a 0.5% gain. The blue-chip indicator fell 184 points Wednesday and 231 points Tuesday.
The Nasdaq composite index--down nearly 4% in the two previous trading days--edged up 5.57 points Thursday, or 0.2%, to 2,806.84.
The Standard & Poor’s 500-stock index fell 2.13 points, or 0.2%, to 1,283.42. Losing issues outnumbered gainers by a 3-2 ratio on the New York Stock Exchange.
The link between the stock and bond markets tends to be loose, analysts say. Rising interest rates hurt bonds by definition, automatically causing prices to fall. But rising rates also hurt stocks eventually because they slow the economy, increase corporate borrowing costs and crimp profits--and profits are supposed to be what drive stock prices.
Since Jan. 1, the 30-year Treasury bond has lost 13.8% in total return--its worst performance ever for such a period. For the 12 months ended Sept. 30, the loss was 16.9%, according to bond analyst James Bianco of Bianco Research in Chicago.
From its low of 4.71% last October, the yield has risen a stunning 1.61 percentage points. Yet the stock market--as measured by the total return of the S&P; 500 index--has soared 30%. So rising rates don’t matter?
“I’m afraid we’re going to have to totally annihilate the bond market before the stock market even notices,” Bianco said. “Where’s the point where the stock market says uncle? It’s not 6.25%. Do we have to go north of 7%?”
Larry Dyer, bond strategist at CS First Boston, said stocks are “allowed to do well in an environment where the Fed is doing a terrific job” of keeping inflation in check without snuffing out economic growth.
He acknowledged that inflation risks are increasing and that if the central bank feels compelled to tighten much further, it could hurt earnings growth and knock the stock market down.
Most economists are hard-pressed to see much inflation, which tends to make them believe that the bond market may be close to bottoming out.
Bruce Steinberg, Merrill Lynch’s chief economist, thinks there soon may be buying opportunities in Treasury bonds.
But Steve East, a bond trader at Friedman Billings Ramsey in Arlington, Va., thinks the bond market could be in for more rough sledding.
“The trend is your friend,” he said, “and right now it’s pointing the other way [toward higher rates].” If the PPI report or next week’s consumer price index are disappointingly high, “it’s certainly in the realm of possibility that rates go to 6.7%,” East said.
In currency trading, the dollar rose against the euro and yen.
Meanwhile, Bloomberg News reported that U.S. index futures fell today in Tokyo after Fed Chairman Alan Greenspan said surging stock prices have increased the risks of loan losses for banks, which should boost reserves to weather market panics.
Losses will “inevitably emerge from time to time when investors suffer a loss of confidence,” as they did a year ago after Russia defaulted on its bank debt, Greenspan said in a Thursday-evening speech to a conference sponsored by the Office of the Comptroller of the Currency.
Among the day’s equity highlights:
* Tyco International tumbled again, falling $10 to $87, a day after executives blasted a report that the company might be pumping up earnings by dipping into reserves as untrue.
* In the tech sector, Visx plunged $7.75 to $72.88 after reporting quarterly earnings that beat the 34-cent average estimate by 2 cents but disappointed some traders.
Unisys plunged $15.69 to $26.56 after saying it expects 4% sales growth for all of 1999--half the pace of the previous year.
And Electronics for Imaging dropped $5.50 to $48.44 after reporting quarterly earnings of 51 cents a share, versus 31 cents a year ago.
But Apple rocketed $9.13 to $73.19 after predicting strong end-of-year sales, and Emulex jumped $16.25 to $126.25 after an analyst upgrade.
* Other stocks moving on earnings news included Maytag, which climbed $3.88 to $36.88 after saying quarterly profit rose 5.6% to 92 cents, and Polaroid, which lost $3.19 to $22.19 after advising analysts to cut fourth-quarter estimates.
* Capital One Financial fell $4 to $39.25 after saying loan charge-offs rose in the third quarter.
* Global Crossing gained $2.19 to $37 after being added to Goldman Sachs’ “recommended list.”
Market Roundup, C7
