Data Bad for Rates but Good for Stocks
A surprisingly strong February employment report caused more gloom for bond investors Friday, driving yields on Treasury securities to new multiyear highs and signaling higher consumer interest rates ahead.
But the stock market cheered the fresh sign of strength in the economy with a broad rally. The Dow Jones industrial average jumped 104.06 points, or nearly 1%, to 11,076.34.
The gain in jobs last month further cemented the idea that the Federal Reserve would continue to tighten credit, analysts said. And that caused renewed selling in the bond market, as investors figured that rising interest rates would devalue existing fixed-rate bonds.
The yield on the 10-year Treasury note, a benchmark for mortgages, ended at 4.76%, up from 4.73% on Thursday and the highest since June 2004. Bond yields rise as prices of the securities decline.
The six-month T-bill yield ended at 4.78%, up from 4.76% on Thursday and a five-year high.
Bond yields in the U.S., Europe and Japan have been surging since late January amid more signs of strength in the global economy. The Bank of Japan announced Thursday that it would begin to slowly tighten credit as consumer and business spending continued to revive.
“The Fed is going to continue to tighten, and you have higher rates overseas,” said Gary Pollack, head of fixed-income research at Deutsche Bank Private Wealth Management in New York. That is spooking bond investors, many of whom thought throughout 2005 that the Fed would soon stop raising its benchmark rate, he said.
The Fed’s key rate, now 4.5%, has been lifted 14 times since mid-2004, when it was 1%.
Brokerage Morgan Stanley on Friday raised its year-end prediction for the Fed’s rate to 5.25%, from 5%.
Many analysts still expect the Fed to stop at 5%. But David Greenlaw, an economist at Morgan Stanley in New York, said the economy’s resilience, and the potential for an uptick in inflation in the second half of the year, made it more likely that the Fed would get to 5.25%.
That would push bond yields higher as well, he said. He predicted that the 10-year T-note yield also would end the year near 5.25%.
The stock market often is hurt by rising interest rates, which can crimp spending by businesses and consumers. But Friday, winners topped losers by more than 7 to 3 on the New York Stock Exchange.
The blue-chip Standard & Poor’s 500 index rose 9.35 points, or 0.7%, to 1,281.58. The technology-heavy Nasdaq composite rallied 12.32 points, or 0.6%, to 2,262.04.
On Wall Street, the bullish view of higher interest rates is that they’re rising because the global economy is improving. That, in turn, should mean continued growth in corporate earnings, said Tony Dwyer, equity strategist at FTN Midwest Research in New York.
“We have a great economy, low inflation and terrific earnings,” Dwyer said.
But some traders said Friday’s rebound was an overdue snap-back after the modest bout of selling in most of the six previous sessions, as some investors pulled away on concerns about interest rates.
For the week, the Dow gained 0.5%, but the S&P; 500 lost 0.4% and the Nasdaq index slid 1.8%.
Lower oil prices helped the mood Friday. Near-term crude futures in New York fell 51 cents to $59.96 a barrel, the first close below $60 since Feb. 17.
Shares in some emerging markets including Brazil and Mexico also rebounded Friday after heavy selling in recent sessions. Brazil’s main market index rose 1.6% to 36,890.69 but slumped 6% for the week.
Robert Bissell, chief investment officer at Wells Capital Management in Los Angeles, noted that the U.S. stock market had lagged behind the gains of many foreign markets in 2005 and so far this year. For example, the S&P; 500 index is up 2.7% this year while the average European blue-chip issue is up 6.9%.
“We’re the last ones invited to the dance,” Bissell said. But that could mean that the U.S. market has more room to rally, he said.
Among the day’s highlights:
* Industrial stocks led the advance on optimism about the economy. Steel maker Nucor soared $4.98 to a record $95.08 after raising its first-quarter earnings forecast. Also in the industrial sector, Cummins rose $1.24 to $104.66 and Boeing jumped $1.03 to $74.79.
* Mining stocks rebounded from a recent sell-off. Phelps Dodge rose $4.42 to $137.32.
* A Bloomberg index of real estate investment trust shares rose 0.9% to a record high amid merger speculation.
