Bond Yields, Dollar Slide in Expectation of Fed Cut

Stocks closed mostly higher in slow trading Monday, while longer-term bond yields slumped and the dollar hit a 3 1/2-month low against the euro.

The action in the bond and currency markets suggested that traders are betting the Federal Reserve will cut short-term interest rates again. The Fed’s policymaking board meets Aug. 21.

In Tokyo, the Nikkei-225 stock index slid to a new 16-year low.

On Wall Street the buying was half-hearted, analysts said, but winners still topped losers by 8 to 7 on the New York Stock Exchange and by 20 to 17 on Nasdaq.

The Dow industrials eased 0.34 point to 10,415.91.

But the Nasdaq composite index rose 25.78 points, or 1.3%, to 1,982.25, helped by a modest rally in semiconductor stocks after brokerage Goldman Sachs upgraded that sector. Goldman is the latest brokerage to weigh in on the battered chip sector.

Among chip leaders, Intel added 61 cents to $30.56 and Vitesse Semiconductor gained 80 cents to $20.05.

Last week Nasdaq slid 5.3%, ending Friday at its lowest close since April 17.

Among other stock sectors Monday, brokerage shares were broadly lower, as were utilities. Some health-care stocks showed strength, including Eli Lilly, up 64 cents to $78.46, and Beckman Coulter, up $2.30 to $46.87.

The stock market overall has traded in a narrow range this summer, as investors have focused on companies’ weak earnings and their general reluctance to say when business will improve.

Even six interest-rate cuts this year by the Fed--and the prospect of a seventh next week--have failed to inspire any long-term stock market advances. Analysts say investors, tired of making investments during rallies that ultimately fizzle out, are waiting for some signal that profitability is ahead before buying.

By contrast, Treasury bond investors have enjoyed a powerful rally in recent weeks. It continued on Monday.

The two-year T-note yield fell to a record low of 3.68% from 3.69% Friday. That yield was at 4.17% as recently as July 2.

The 10-year T-note yield ended at 4.97% Monday, down from 4.98% Friday and 5.32% July 2.

The bond market is betting on another cut in the Fed’s key short-term rate, now 3.75%, at next week’s central bank meeting, and perhaps more cuts after that, traders say.

The falling dollar also is a sign investors expect lower U.S. rates, analysts say.

It took 89.8 cents to buy one euro Monday, up from 89.4 cents Friday and the most since late April.

The euro’s strength and the dollar’s weakness indicate that currency traders believe dollar-denominated investments are becoming less attractive compared with euro-denominated investments, experts say.

The yen, however, has remained weak against the dollar amid ongoing worries about Japan’s economy.

Those concerns sent the Nikkei stock index down 2.2% to a 16-year low of 11,477.56 on Monday, though the index was up 1.6% by midday today.

Monday’s close was the lowest since the index ended at 11,439.87 on Dec. 24, 1984, and below this year’s previous low of 11,579.27 on July 30.

By contrast, major European stock markets rallied Monday. The German market gained 0.4%, and the French market surged 1.5%.

Market Roundup, C9-10