Bond yields hit 5-year high
Stock prices sank Tuesday as Treasury bond yields shot to their highest level in five years, stoking fears that higher borrowing costs would cut into corporate profits, discourage takeovers and cause more trouble for the housing market.
The Dow Jones industrial average closed down nearly 130 points after a fitful trading session that saw stocks slide and claw their way back, only to drop again.
The yield on the benchmark 10-year Treasury note, which late Monday was at 5.15%, soared Tuesday to 5.3%, a peak unmatched since May 2002.
Surging takeover activity had helped boost stocks to successive record highs until early last week, when the surge in bond yields unnerved equity investors and triggered a sell-off.
“It’s partially an excuse to take profits, but there are also some legitimate concerns that if bond yields get high enough, they will present an attractive alternative to stocks, and that higher interest rates will reduce private equity activity,” said Edward Yardeni, president of Yardeni Research Inc.
Helping to push yields up further Tuesday were remarks by Alan Greenspan. The former Federal Reserve chief predicted an end to a global glut of financial liquidity and a further increase in bond yields.
The Dow Jones industrial average fell 129.95 points, or 1%, to 13,295.01.The index is 381 points, or 2.8%, below its record close of 13,676.32, reached June 4.
The broader stock indexes also declined. The Standard & Poor’s 500 index fell 16.12 points, or 1.1%, to 1,493, while the Nasdaq composite index dropped 22.38 points, or 0.87%, to 2,549.77.
The Russell 2,000 index of smaller-company stocks dropped 11.46 points, or 1.4%, to 821.72.
The stock market saw losses in most sectors Tuesday. Declining issues outnumbered advancers by an unusually high ratio of 6 to 1 on the New York Stock Exchange.
Shares of home builders were especially weak as investors worried that rising rates on fixed-rate mortgages could deter Americans from buying homes.
Westwood-based KB Home slid 97 cents, or 2.2%, to $43.06. Ryland Group, the largest builder for first-time buyers, declined $1.15, or 2.7%, to $41.59. Pulte Homes fell 74 cents, or 2.9%, to $24.65. Lennar slid $1.12, or 2.6%, to $41.94.
Centex fell $1.18, or 2.6%, to $44.09. Hovnanian Enterprises sank 86 cents, or 4.1%, to $20.31.
The average 30-year fixed-rate mortgage was at 6.33% on Tuesday, up from 6.07% a week earlier, according to Bankrate.com.
Many analysts see the recent pullback in stock prices as a short-term dip before reports on second-quarter profits come in. The earnings could easily beat the expectation for year-to-year gains averaging 4%, Yardeni said.
“We go through these little panic attacks in the market,” he said “Often these panic attacks turn out to be buying opportunities.”
The dollar was mixed Tuesday against other major currencies. Gold prices fell.
Oil futures slipped 62 cents to $65.35 a barrel on the New York Mercantile Exchange.
* Rate concerns also hit real estate investment trusts. A Bloomberg REIT index slumped 1.8%. Simon Property Group, the largest U.S. shopping mall owner by market value, slid $2.60, or 2.6%, to $96.81. Vornado Realty Trust, which owns 22 million square feet of Manhattan office and commercial space, dropped $2.42, or 2.1%, to $111.83.
* Financial shares were the biggest drag on the S&P; 500 as higher interest rates were expected to crimp demand for mortgages and other loans. Citigroup fell 87 cents, or 1.6%, to $52.60. JPMorgan Chase slipped $1.08, or 2.1%, to $49.35.
* The S&P; utility index dropped 1.5% as rising bond yields made the generally high dividends paid by utilities less attractive. Phone giant AT&T;, also known for its high dividend, was the heaviest drag on the S&P; 500. AT&T;’s stock fell $1.04, or 2.6% to $39.08.
* A decline in oil prices put pressure on shares of energy companies. Exxon Mobil fell $1.06, or 1.3%, to $82, making it one of the heaviest drags on the S&P; 500. Chevron fell 80 cents, or 1%, to $80.56.
* Netflix, the biggest provider of DVD rentals via the mail, tumbled for a second day. The shares sank $1.85, or 8.4%, to $20.08 after Citigroup cut its rating in response to a lower-priced subscription plan from rival Blockbuster. Netflix, based in Los Gatos, Calif., is down 20% over the last two days.
* Dean Foods, the largest dairy company in the United States, warned that its full-year profit before certain items would miss Street forecasts because of rising raw milk prices and an oversupply of organic milk. The stock fell $1.39, or 4.3%, to $31.07.
* Texas Instruments fell 75 cents, or 2.1%, to $35.04, after the maker of semiconductors narrowed its second-quarter forecast late Monday.
* Continental Airlines slumped $1.59, or 4.5%, to $34.10 after analysts cut their earnings forecasts for the company.
* Take-Two Interactive Software rose 39 cents, or 2.1%, to $19.33 after the video game publisher unveiled plans to cut costs.
* Overseas, key stock indexes fell 0.4% in Japan, 0.7% in Britain, 0.4% in Germany and 0.7% in France.
