Stocks Slide and Bond Yields Surge on Interest Rate Worries
Stocks tumbled and Treasury yields surged Wednesday as the latest economic reports fueled fears that the Federal Reserve might raise interest rates by a half-point when it meets in mid-May.
The yield on the 30-year bond shot up to 6.11% from 6.01% the day before. It has now surged nearly half a percentage point since April 10 on inflation concerns.
“The Fed is now on a mission to slow the very strong economic growth rates,” said Andrew Couch, head of global equities at Investec Guinness Flight. “That is an obvious negative for the market.”
All three major U.S. stock indexes fell more than 2% despite a late rally.
Treasury securities were weak across the spectrum, with the 10-year note yield rocketing 10 basis points to 6.40%, and the two-year note climbing to its highest level in more than five years.
Growing expectations for a half-point rise in the federal funds rate to 6.5% can be seen in the 6.44% implied yield on the June fed fund futures contract, a gauge of investor sentiment about the Fed’s target for overnight lending between banks. The yield climbed 15 basis points in the last two weeks.
The 30-year bond still has returned 7% this year, boosted by the Treasury’s plan to buy back $30 billion in long-term securities as it uses part of the government’s surplus to reduce the national debt. The Treasury’s announcement Wednesday that it intends to stick with the plan hurt bonds, because some investors had bet that the government would increase the total of repurchases this year.
The next big economic indicator for investors comes Friday with the April employment report, which may show growth continued to expand at a fast clip.
Meanwhile, investors will try to decipher comments by Fed Chairman Alan Greenspan today for clues on how much the central bank may raise rates this month, analysts said.
In Wednesday’s rocky session, the Nasdaq composite index fell 78.14 points, or 2.1%, to 3,707.31, after fighting back from a 5% intraday drop; the Standard & Poor’s 500 declined 31.19 points, or 2.2%, to 1,415.10; and the Dow Jones industrial average dropped 250.99, or 2.3%, to 10,480.13.
More than two stocks fell for every one that rose, although volume was light.
Selling pressure eased in the session’s final hour, allowing market averages to pare their losses. But analysts said the broad sell-off was a stark reminder that the pessimism that dominated the market just a few weeks ago still hangs over Wall Street.
“There’s been a significant change in investors’ perceptions,” said Rao Chalasani, chief investment strategist at First Union Securities in Chicago. “Until early March, bad news was ignored. Now, bad news is perceived as bad news and even good news is treated with skepticism.”
Among the equity highlights:
* Novell plunged $6.94 to $10.63 after saying it missed profit projections. The company, whose shares have sunk 70% this year, blamed the reorganization of its sales team for the shortfall.
Earnings woes also hurt S1, which fell $17.06 to $42.31 after the provider of online financial services said its first-quarter loss widened to $1.49 a share from 13 cents a year earlier.
Manor Care plummeted $4.63 to $7.50 as the long-term care center operator said its first-quarter profit fell short of the First Call/Thomson Financial estimate.
* AT&T; skidded $2.13 to $39.81, adding to Tuesday’s 14% slide.PaineWebber and Donaldson, Lufkin & Jenrette downgraded the stock a day after the company warned that full-year operating profit will probably fall shy of previous estimates.
* Retail shares slid after Goldman Sachs slashed ratings across the sector and bumped Wal-Mart, Kohls, Costco Wholesale and Target from its “recommended” list.
Wal-Mart fell $4.19 to $53.44, Kohls lost $3.81 to $48, Costco slipped $2.56 to $52.19 and Target slumped $5.13 to $63.75.
Elsewhere in the sector, Sears slipped $2.63 to $36.44, Tiffany dropped $4.44 to $68.56, Neiman-Marcus Group fell $1.75 to $25.06, TJX eased $1.19 to $17.88 and Ross Stores lost $1.38 to $19.63.
* General Motors also got hit by a downgrade, sinking $5.31 to $88.06 after Lehman Bros. cut the world’s biggest car maker to “outperform” from “buy,” saying Ford might be a better bet.
But Sanmina rose $1.06 to $53.44 after the contract electronics maker was raised to “top pick” by Donaldson Lufkin & Jenrette.
* Kulicke & Soffa Industries sagged $9.38 to $67.44 after the chip equipment maker’s chief executive said he will sell as many as 250,000 shares.
* Among Southern California companies, Global Crossing rallied $1.50 to $34.13 after reporting a smaller-than-forecast loss, but Wet Seal fell $3.25 to $15 after issuing a profit warning.
Overseas, Japanese markets were closed for a holiday. Germany’s main index fell 2.4%, Britain’s fell 3% and France’s fell 1.9%.
Market Roundup, C9-10
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Troubled Treasuries
Wednesday’s bond market slump sent yields higher on concern about economic acceleration and potential interest rate hikes by the Federal Reserve. Yields have risen dramatically since hitting recent lows April 10.
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Treasury Yield security April 10 Wednesday 2-year 6.26% 6.75% 5-year 6.07 6.66 10-year 5.77 6.40 30-year 5.67 6.11
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For a more complete chart of the 30-year Treasury bond, see Investor Spotlight on C10.
Source: Bloomberg News
