Bond Yields Sink; Stocks Staunch Profit Taking
Long-term bond yields sank to three-month lows Tuesday after Federal Reserve Chairman Alan Greenspan sought to dispel investors’ fears about the nation’s ability to fund its financial deficits with the rest of the world.
But the stock market pulled back despite the bond rally, as some investors took profits ahead of the coming barrage of fourth-quarter corporate earnings reports.
The Dow Jones industrial average lost 58 points, or 0.6%, to 10,427.18, though it recovered from an early drop of 118 points.
The tech-dominated Nasdaq composite index fell 15.34 points, or 0.7%, to 2,096.44, its biggest drop since Dec. 15.
But losers had only a narrow edge over winners on Nasdaq and on the New York Stock Exchange.
The day’s hottest action was in the bond market. The yield on the benchmark 10-year Treasury note slid to 4.01% from 4.09% on Monday, and now is the lowest since Oct. 2. As recently as Jan. 2 the yield was 4.38%.
Greenspan, in a speech in Berlin, implied that concerns about the huge deficit in the U.S. current account, the broadest measure of the nation’s trade balance, were overblown.
The nation ran a deficit of $135 billion in its current account during the third quarter, the third-largest on record.
“There is, for the moment, little evidence of stress in funding U.S. current account deficits,” Greenspan said.
Some economists have argued that the trade deficit and the federal budget deficit could lead to a financial crisis if foreign investors become unwilling to extend more credit to the United States.
But “to date, the widening to record levels of the U.S. ratio of current account deficit to [gross domestic product] has been, with the exception of the dollar’s exchange rate, seemingly uneventful,” Greenspan said.
And though the dollar has slumped in the last year, Greenspan said he was “quite optimistic” the decline wouldn’t become a crisis, in part because “inflation, the typical symptom of a weak currency, appears quiescent.”
His comments, and those by other Fed officials, suggested that the central bank sees no need to raise interest rates soon. That triggered a rush by some investors to lock in bond yields.
The five-year T-note yield dropped to 2.95% from 3.05% on Monday. It hadn’t been below 3% since Oct. 2.
“Greenspan gave the bond market one less reason to worry about a rate hike,” Stephen Stanley, an economist at Greenwich Capital Markets Inc. in Greenwich, Conn., told Bloomberg News.
Also Tuesday, Dallas Fed President Robert McTeer said he expects strong growth without inflation for “some time.” And Fed Gov. Mark Olson, asked after a speech when the central bank might consider raising interest rates, said, “not for a considerable period,” echoing the Fed’s recent official statements.
The dollar, which might be expected to fall further in the absence of higher interest rates, was little changed against the euro after reaching record lows in recent days.
On Wall Street, sellers dominated early in the day, which traders said appeared to stem from nervousness about corporate profit reports. Computer chip giant Intel, for example, will report results today. Its shares slipped 56 cents to $33.59.
“We’re in earnings season, so that’s completely dominating what most market watchers are looking at,” said Brian Bruce, director of global investments, Pan-Agora Asset Management Inc. in Boston. “They want to see no disappointments.”
Among the day’s highlights:
* The Dow was led lower in part by Alcoa, which continued to slide in the wake of its disappointing earnings report issued last week. Alcoa lost 82 cents to $35.15. It has fallen 9.1% from its high last week.
Some other metals and mining stocks also slumped. Inco fell $1.06 to $37.68 and Phelps Dodge dropped $3.05 to $74.45.
* In the tech sector, Accenture fell $3.25 to $22.66 after the tech consulting firm reported quarterly earnings below expectations and said its profit margins remain under pressure.
Also in the sector, IBM fell $1.85 to $89.70, Qlogic sank $1.95 to $50.36 and SAP dropped $2.27 to $42.18.
* Falling interest rates may have helped boost some real estate investment trusts. Simon Property rose 90 cents to $48.90, Rouse gained 70 cents to $47.28 and Macerich was up 58 cents to $44.89.
But home builders were weaker. Lennar fell $2.12 to $87.50 and Centex lost $1.59 to $98.81.
