Stocks tumble as yields rise
A surge in Treasury yields rattled Wall Street on Wednesday, forcing stocks to give up early gains and driving down the Dow Jones industrial average more than 140 points.
The 10-year Treasury note’s yield jumped to 5.15% from 5.09% late Tuesday, reigniting worries among stock investors that high rates could thwart corporate deal-making and further hurt the limping housing market.
Financial stocks in particular lost ground as the rising Treasury yields fed concern that losses on bonds backed by sub-prime mortgages would grow.
Rising borrowing costs showed up in a report Wednesday from the Mortgage Bankers Assn., which said applications for home loans fell 3.4% last week as mortgage rates -- closely tied to the 10-year Treasury yield -- increased.
Housing woes helped spur losses in two Bear Stearns hedge funds this year. A decision Wednesday by Merrill Lynch, a creditor to the funds, to seize and sell $800 million of bonds held as collateral for loans, added to worries that the sub-prime fallout might worsen.
Shares of Bear Stearns slid $3.59, or 2.4%, to $143.20. JPMorgan Chase fell $1.39, or 14%, to $49.36. Merrill Lynch dropped $2.36, or 2.6%, to $87.68.
Morgan Stanley slipped 48 cents to $87.32 even though it posted stronger-than-expected earnings.
The stock market started reacting strongly to Treasury yields two weeks ago when the 10-year yield surged past 5% for the first time since last summer. Wall Street had traded more mildly in recent days as yields retreated from last week’s peak of nearly 5.30%, but Wednesday’s yield advance stoked fears that they could return to that elevated neighborhood.
“People are watching this 10-year, and it looks like it might want to go back to 5.25,” said Todd Leone, managing director of equity trading at Cowen & Co. Until last week, the 10-year Treasury yield had not traded consistently above 5.25% since 2002.
Furthermore, Leone said, the wave of private equity deal-making, which was a main driver of solid stock gains for several weeks, seemed to have slowed a bit compared with last month. Private equity investors, Leone said, “are doing a little more homework, and there aren’t as many companies to grab up.”
The Dow ended down 146 points, or 1.1%, at 13,489.42, after bobbing in and out of positive and negative territory early in the day. The Standard & Poor’s 500 index declined 20.86 points, or 1.4%, to 1,512.84, and the Nasdaq composite index fell 26.80 points, or 1%, to 2,599.96.
The Russell 2000 index of smaller-company stocks fell 12.16 points, or 1.4%, to 836.18.
Declining issues outnumbered advancers by more than 3 to 1 on the New York Stock Exchange.
Wednesday was light on economic data, except for word that applications for home loans fell 3.4% as mortgage rates -- closely tied to the 10-year Treasury yield -- increased.
But today will bring the Labor Department’s weekly report on initial claims for unemployment benefits, the Conference Board’s index of leading economic indicators and the Philadelphia Federal Reserve’s June index of business activity. Each report has the potential to move the Treasury market and therefore the stock market as well.
The dollar was mixed against other major currencies, while gold prices fell.
Oil prices retreated. Crude futures slipped 91 cents to $68.19 a barrel on the New York Mercantile Exchange, and gasoline futures also fell. The government said in its weekly inventory report that crude oil stockpiles rose 6.9 million barrels last week and gasoline stockpiles rose 1.8 million barrels.
In other market highlights:
* The drop in oil prices hurt energy stocks. Exxon Mobil slumped $3.02, or 3.5%, to $82.82. Occidental Petroleum dropped $1.99, or 3.4%, to $57.11.
* FedEx shares rose $1.74, or 1.6%, to $109.80 after the company reported that its fiscal fourth-quarter profit rose 7%, boosted by an 8% increase in revenue fed by higher package volume.
* Home Depot, one of the 30 Dow components, rose $1.76, or 4.6%, to $40.03 after announcing the previous day that it would buy back more than a quarter of its shares and sell its Home Depot Supply business to a group of private equity firms for $10.3 billion.
* MGM Mirage fell $5.90, or 6.8%, to $80.90 after Los Angeles billionaire Kirk Kerkorian’s investment arm said it was ending discussions to buy the company’s Bellagio hotel-casino and CityCenter project in Las Vegas.
* Darden Restaurants sank $3.41, or 7.3%, to $43.44. The operator of the Olive Garden and other restaurant chains swung to a loss in its latest quarter.
* Germany’s main stock index rose 0.7% to its first record close since March 2000. Elsewhere overseas, key indexes rose 0.3% in Japan and 0.4% in France but fell slightly in Britain.
