Bond Yields Skid on Signs of a Slowing U.S. Economy

New data suggesting the economy is indeed slowing helped send Treasury bond yields tumbling Friday and fueled a modest rally on Wall Street.

The yield on the two-year Treasury note, a security highly sensitive to expectations for Federal Reserve changes in its benchmark short-term interest rate, tumbled from 6.25% on Thursday to 6.16% on Friday, the lowest in nearly eight months.

Longer-term yields also slid after the government said private-sector employers added a net 138,000 jobs in July, fewer than many economists expected.

“The numbers give credence to the slowing-economy theory that’s been developing over the past few weeks,” said James Welch, money manager at Back Bay Advisors in Boston.

On Wall Street, stocks closed mostly higher, with the Nasdaq composite index gaining 27.48 points, or 0.7%, to 3,787.36, after fading from a morning peak of 3,846.

The Dow Jones industrials rose 61.17 points, or 0.6%, to 10,767.75.

“There was no damage done” to the growing perception that the Fed won’t raise rates at its Aug. 22 meeting, said Greg Tuorto, money manager at Tocqueville Asset Management. “That’s why stocks reacted positively.”

For the week, the Nasdaq index gained 3.4%, recouping about a third of last week’s 10.5% plunge. The Dow rose 2.4% for the week after falling 2.1% the previous week.

Year to date the Nasdaq still is down 6.9% and the Dow is off 6.3%.

Many investors continue to be wary of stocks despite growing belief that the Fed is finished with its year-long credit tightening to slow the economy and subdue inflation.

For some investors, the concern now has shifted to how much of a slowdown the economy might see, and what affect that might have on corporate profits.

On Friday, however, investors seemed buoyed enough to push up a broad range of stocks. Winners outnumbered losers by 22 to 17 on Nasdaq in moderate trading. On the New York Stock Exchange winners topped losers by 17 to 11.

Bank and other financial stocks--considered most sensitive to interest rate fluctuations--were the leaders Friday, as buyers bet that the near-term trend in rates is down or at least flat.

Winners included Citigroup, up $2.19 to a record $73.50; J.P. Morgan, up $8.25 to $143.25; Bank of America, up $3.44 to $52.50; Merrill Lynch, up $4.94 to a record $135.75; and Allstate, up 94 cents to $29.50.

Many utility stocks also gained, while real estate investment trust shares, hot recently, pulled back.

In other markets, crude oil futures rose more than 4%, gaining for a fourth-straight session, as an unexpected drop in U.S. inventories sparked concern about a possible shortage of heating oil this winter. Near-term oil futures in New York rose $1.30 to $29.96 a barrel.

Energy stocks were mixed. Conoco fell 94 cents to $22 while Apache Corp. gained 81 cents to $53.38.

In currency trading, the dollar was little changed, with the euro hovering just below 91 cents, near its lowest since late May.

Among technology stocks, gainers Friday included Gateway, up $6.38 to $62; Emulex, up $20.38 to $67.94; Macromedia, up $3.81 to $82.69; and Nortel Networks, up $1.63 to $74.50.

But many semiconductor stocks weakened further. They have been leading the recent slide in the tech-heavy Nasdaq index. The Philadelphia semiconductor index, or SOX, fell 3.1%, its fourth-straight loss. It closed below its 200-day moving average, an important technical indicator of the sector’s health.

Kulicke & Soffa said Wednesday that some of its customers were delaying orders for its semiconductor assembly equipment. The stock plunged Thursday and eased 13 cents on Friday to $16.50.

Among other chip-related stocks Friday, Intel slid $2.50 to $62.56, Micron Technology fell $4.44 to $73.13 and Texas Instruments was off 50 cents to $55.25.

“The Kulicke & Soffa report shook people to the foundations,” questioning the duration of the current chip boom, said one analyst.

In the entertainment sector, Viacom’s class A shares soared $3.06 to a record $74.63. At least two brokerages made favorable comments about the company in the wake of Thursday’s earnings report.

Market Roundup: C4

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EMPLOYMENT REPORT

The U.S. jobless rate held steady at 4% in July. A1

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Betting the Fed Is Done

Investors Friday pushed the yield on the

two-year Treasury note to its lowest level in

nearly eight months, a bet the Federal

Reserve is finished raising

interest rates.

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Monthly closes and latest for two-year T-note yield

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Friday: 6.16%

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Source: Bloomberg News