Stocks Struggle as Bond Yields Surge Again
Stocks were mixed Wednesday as investors digested a surprisingly strong retail sales report and grappled with a resurgence in bond yields that some analysts feared could choke off the economic recovery.
In a choppy session, blue chips were down for most of the afternoon before staging a mild rally in the final minutes of trading. Tech stocks ended nearly unchanged overall.
Investors were unsettled as longer-term government bond yields increased for a fourth straight session. The yield on the benchmark 10-year Treasury note jumped from 4.43% Tuesday to 4.56% -- its highest close since July 30, 2002.
“There was good economic news this morning, but bond yields are going higher and the bonds are getting crushed, and that has weighed on the [stock] market,” Todd Leone, head of listed trading at S.G. Cowen, told Reuters.
“The market’s a little bit leery that interest rates might hurt growth a little bit, so the market’s holding back.”
The blue-chip Dow industrial average declined 38.30 points, or 0.4%, to 9,271.76. The broader Standard & Poor’s 500 fell 6.32 points, or 0.6%, to 984.03.
The tech-heavy Nasdaq composite index dipped a fraction of a point, or less than 0.1%, to 1,686.61, although winners led losers by a thin margin on the Nasdaq market.
On the New York Stock Exchange, losers led by 9 to 7.
Volume was meager as Wall Street’s summer doldrums continued. Trading since Friday has been the NYSE’s slowest four-day stretch this year.
Stocks rose at the open after a report showed retail sales climbed 1.4% last month, blowing past expectations for a 0.9% increase. But the market -- which had jumped Tuesday after the Federal Reserve left its key short-term interest rates unchanged at 1% -- cut its gains minutes later.
The retail sales report rocked the bond market, where the yield on the 10-year T-note has risen almost by half since mid-June on signs that low interest rates and tax cuts are stoking growth, which may lead to higher inflation and moves by the Fed to raise short-term rates.
Bond investors dumped securities Wednesday even though the Fed on Tuesday pledged to hold down short-term rates “for a considerable period.”
For the economy, “It’s like everyone’s waking up at the same time,” said Ram Bhagavatula, economist at Royal Bank of Scotland Financial Markets. That suggests that U.S. economic growth of more than 6%, annualized, is possible this quarter, compared with just 2.4% last quarter, he said.
In addition, the rise in bond yields is forcing managers who invested in mortgage-backed securities to sell Treasuries as a hedge. This vicious cycle showed little sign of stopping Wednesday, with applications for mortgages and refinancings slumping last week, greatly lessening the risk of mortgage prepayment.
The impact showed at mortgage giant Fannie Mae, which reported its duration gap -- a measure of exposure to changes in interest rates -- had widened to plus 6 months in July from minus 1 month in June. Traders feared the agency would have to sell Treasuries to bring its duration back in line and anticipated it by marking prices lower.
Fannie Mae’s stock fell $1.23 to $62.42, while shares of fellow mortgage giant Freddie Mac slipped 23 cents to $50.20.
In other highlights:
* Wal-Mart Stores’ lost 73 cents to $58.07 after the retailer said its quarterly earnings rose nearly 21%. It said it saw earnings for the current fiscal year at the higher end of its previous forecast, but below analysts’ average profit projections. The Morgan Stanley index of retailing stocks inched up 0.2%.
* Home builders’ shares sank on news of the decline in mortgage applications last week to their lowest level in more than a year. Toll Bros. skidded $1.83 to $27.72 and Centex declined $2.48 to $73.74. The S&P; index of homebuilding stocks rose 3.2%.
* Applied Materials, the world’s largest maker of microchip production tools, rose 62 cents to $19.07. The company reported a loss but gave optimistic comments about the potential for new orders. * Gold prices rallied, with near-term futures up $3.60 to $362.10 an ounce in New York trading.
