As Bond Yields Surge, Stocks Slip
It was a blue Monday on Wall Street as Treasury bond yields surged anew and stocks gave up most of Friday’s gains.
Sellers swarmed late in the day in the Treasury market, driving the 10-year T-note to 4.21%, up from 4% on Friday and the highest level since Dec. 2. The rebound from the 10-year note’s closing low June 13 now has reached 1.10 percentage points -- a stunning backup in a market where the bulls were running rampant all spring.
Analysts said investors feared a “perfect storm” of a recovering economy, a massive supply of new bonds and technical selling related to portfolio managers’ holdings of mortgage-backed bonds. In theory, Treasuries are becoming more appealing as yields rise -- yet buyers aren’t rushing to step up.
“Investors should be very cautious about holding Treasuries at this point,” Paul Calvetti, head of Treasury trading at Barclays Capital Inc., told Bloomberg News. The Federal Reserve’s “policy right now of holding rates low makes owning longer-maturity Treasuries dangerous.”
In the stock market, rising yields may have spooked investors Monday. The Dow Jones industrial average lost 91.46 points, or 1%, to 9,096.69, while the broader S&P; 500 fell 14.52 points, or 1.5%, to 978.80. The technology-laden Nasdaq composite index dropped 27.09 points, or 1.6%, to 1,681.41.
Volume was only moderate, which traders said helped exacerbate the market’s decline. Losers trounced winners by almost 3 to 1 on the New York Stock Exchange and by 2 to 1 on Nasdaq.
It was the fourth loss in the last five days on Wall Street and dashed hopes for a follow-through from a modest rally Friday. Technology stocks took the brunt of the selling after printer maker Lexmark International warned of soggy profit and a Wall Street brokerage cut its investment rating on cell phone maker Motorola.
Lexmark, the No. 2 printer maker, behind Hewlett-Packard, fell $14.10, or 19%, to $59.40 after it reported higher earnings but warned of a shortfall in third-quarter profit due to softness in corporate and consumer spending. The decline triggered a drop in HP, a Dow component, whose shares fell 72 cents to $21.83.
Motorola fell 33 cents to $8.72 after Credit Suisse First Boston cut its rating on Motorola to “underperform” from “neutral.” The Amex index of 20 wireless phone companies fell more than 2%.
In the bond market, some investors are selling Treasuries to hedge their portfolios of mortgage-backed securities. In addition, demand for government securities may decline because the Treasury is likely to increase the sale of debt securities to finance a record budget deficit, some investors said. The Treasury will announce on July 30 how much it will sell of three-, five- and 10-year notes in the next three months.
The government said last week that the budget deficit would reach $455 billion, the largest in U.S. history, in the fiscal year ending Sept. 30 and widen to $475 billion the following year.
Investors may be less willing to buy Treasuries after Federal Reserve Chairman Alan Greenspan suggested the central bank is unlikely to purchase government debt to lower long-term yields, a Ried, Thunberg & Co. survey found.
In the latest economic news, the Conference Board said its monthly index of leading indicators rose 0.1% in June, slightly below economists’ forecasts. Still, June marked the gauge’s third straight month of gains, suggesting that the struggling economy will pick up this year.
The tepid economic report helped push the dollar down against the euro in New York trading, where the euro ended at $1.134 on Monday. The dollar gained against the yen, however.
“We are seeing the stock market and the dollar being driven by the same factors: how strong the recovery is and how strong earnings are,” said Bryan Smith, head of currency trading at Barclays Global Investors in San Francisco.
In other highlights:
* Drug maker Merck fell $1.95 to $59.82 after it reported disappointing second-quarter earnings and trimmed its 2003 forecast for its best-selling medicine, cholesterol fighter Zocor. The Amex index of 15 pharmaceutical stocks fell 2.1%.
* 3M helped limit the Dow’s decline after the conglomerate reported earnings that beat its forecast and Wall Street’s average view. Its shares rose $6.17 to $136.35.
* European markets were weak, with key indexes falling 1.5% in France, 2.4% in Germany and 0.7% in Britain.
Market Roundup, C6-7
