Bonds Struggle as Stocks End Mixed
Stocks were mixed Monday but bond investors endured another day of turmoil as yields on Treasury securities surged to an eight-month high.
The yield on the benchmark 10-year Treasury note, which moves in the opposite direction of its price, jumped to 4.28% from 4.17% Friday. Traders blamed everything from a Federal Reserve official’s upbeat take on the economy to a renewed bout of mortgage-related selling.
A looming supply of debt from the Treasury’s upcoming quarterly refunding is compounding the relentless pressure on the government debt markets, which have suffered their biggest two-week sell-off since late 2001.
Also, stock and bond traders were waiting for a slew of economic reports due out this week, which bond bulls fear could point to a strong bounce in economic growth during the second half of the year, further driving up interest rates.
On Wall Street, the Dow Jones industrial average fell 18.06 points, or 0.2%, to 9,266.51, while the broader Standard & Poor’s 500 index sagged 2.16 points, or 0.2%, to 996.52. The technology-laden Nasdaq composite index rose 4.66 points, or 0.3%, to 1,735.36.
Losers led winners by almost 9 to 8 on the New York Stock Exchange, but winners held a 3-2 edge on Nasdaq. Trading was light.
Economic indicators due this week include second-quarter GDP and the Fed’s “beige book” report, along with July consumer confidence and auto sales. July payrolls are expected to show the first gain in jobs in five months, while the Institute for Supply Management survey should show improvement in the industrial sector.
Fed Chairman Alan Greenspan has said short-term interest rates “would remain low for as long as necessary,” noted Michael Cloherty, a fixed-income strategist at Credit Suisse First Boston. “If we see the data pick up, people will begin to reevaluate exactly what ‘as long as necessary’ means.”
Early Monday, Fed Bank of Chicago President Michael Moskow reiterated the recent optimism of other Fed officials, saying the economy looked set for a rebound in the remainder of this year and next.
He also said the chances of deflation were low, and therefore it was unlikely that the Fed would have to lower its key rate to zero from the current 1%.
Longer-term bond yields also are facing upward pressure from technical factors, analysts said. For example, some portfolio managers are offsetting the risk of holding mortgage-backed bonds by paring their Treasury holdings.
The sharp rise in Treasury yields comes just as the market faces a torrent of new supply: The government on Monday said it would borrow a net $104 billion in the July-to-September period and $126 billion in the subsequent three months.
Meanwhile, signs of economic strength have encouraged some stock investors. But second-quarter corporate profits, although largely coming in on target, have not been stellar enough to satisfy investors looking for clear signs that earnings are set to surge.
“One of the reasons you can’t bid this market higher is, for some of the earnings that have been coming up, the expectations were a little high,” said Taai Izushima, head trader for Daiwa Securities America. “But it’s not like we’re being disappointed by them either, so it’s not taking us any lower.”
On Monday, Northrop Grumman and Kellogg issued solid earnings reports. But the news from gas supplier Air Products and Chemicals wasn’t as rosy. Northrop gained $5.26 to $92.36 and Kellogg added 77 cents to $34.77, while Air Products fell 79 cents to $45.94.
In other highlights:
* AT&T; was the Dow’s biggest percentage gainer after Credit Suisse First Boston said it raised its rating to “outperform” from “neutral.” AT&T; rose $1.79, or 9%, to $22.20. Other phone companies followed AT&T; higher. Verizon, the largest U.S. local-phone provider, rose 94 cents to $35.98 and No. 2 SBC Communications added 41 cents to $23.95.
* Humana, the operator of health plans for U.S. military families, jumped 85 cents to $17.68. It reported second-quarter profit, excluding a gain on a venture capital investment, that topped expectations. It also increased its 2003 forecast.
* Healthtronics Surgical Services fell $2.92 to $7.95. The provider of orthopedic services reduced 2003 profit estimates to as little as 45 cents a share, from its previous forecast of 69 cents to 74 cents, because of slower-than-expected sales growth.
* Shares of Fannie Mae and Freddie Mac tumbled as mortgage rates climbed and reports surfaced that the European Central Bank was selling its holdings of bonds issued by the mortgage financers -- and urging its 12 member banks to do the same. Freddie Mac fell 14 cents to $50.61 and Fannie Mae lost $1.01 to $64.34.
Market Roundup, C8-9
