FINANCIAL MARKETS : Bond Yields Up, Dollar Posts Strong Gain

Market Overview

* Bond yields rose sharply amid doubts that Congress will approve President Clinton’s budget-cutting plan, which has been a key reason for the bond market’s recent rally.

* The dollar bounced off a record low against the Japanese yen in New York amid a concerted effort by the Clinton Administration to dispel speculation it favors a sharply higher yen.

* Blue chip stocks closed higher Tuesday as investors sought cheap values after a six-session string of losses.

Credit

Long-term interest rates were also boosted by new economic data that stoked inflation worries.

The yield on the Treasury’s 30-year bond rose to 6.90%, its highest level in nearly three weeks. On Monday, the bond’s yield closed at 6.83%. Its price fell 7/8 point, or $8.75 per $1,000 in face value. Its price and yield move in opposite directions.

Leon Panetta, Clinton’s budget director, was quoted in the Wall Street Journal on Tuesday as saying he has grown more discouraged about the outlook for passage of the deficit-reduction plan.

Much of the bond market’s recent rally has focused on prospects for a lower budget deficit, which would reduce the number of bonds issued by the government to cover the debt.

Clinton underscored that deficit reduction was a top priority in a speech Tuesday.

Meanwhile, the government announced that personal income rose across much of the country last year, and the Conference Board said its consumer confidence index strengthened in April after three straight monthly drops.

The signs of a stronger economy raised concerns about inflation, which can eat away the returns of fixed-income investments such as bonds.

Bond prices were also weakened during the day by poor results at the government’s auction of two-year notes.

Although the two-year note auction produced the lowest yields on record, they were higher than Wall Street had expected, and bidding appeared weak.

Short-term Treasuries fell 5/32 point to 1/4 point, and intermediate maturities fell 3/8 point to 15/32 point, the financial information service Telerate Inc. reported.

The federal funds rate, the interest on overnight loans between banks, was 2%, down from 3.125% late Monday.

Currency

Currency traders reported that the Federal Reserve began aggressively buying dollars for yen early in the New York session. Then Treasury Secretary Lloyd Bentsen told a Senate subcommittee that “attempts to artificially influence or manipulate exchange rates are inappropriate.”

The one-two punch drove the dollar sharply higher against the yen and also helped push it up against major European currencies.

The Bentsen remarks before the Senate Appropriations Committee and the reported Fed intervention stemmed a recent dollar plunge that began 10 days ago, after President Clinton said that a declining dollar would help to address America’s huge trade imbalance with Japan.

That decline continued in Tuesday trading, with the dollar falling to a record postwar low of 109.15 Japanese yen in New York before the Federal Reserve reportedly intervened four times in an aggressive attempt to bolster the dollar. Market estimates of the purchases ranged from $300 million to $400 million, MMS International analyst Lisa Pazer said.

The remarks drove the dollar about 2% higher, lifting it to highs of 111.85 yen in New York. It settled at 111.70 yen, up from late Monday’s 110.60 yen.

The dollar’s rise against the yen spilled over into European currencies. It rose to 1.582 German marks, up from 1.568 the day before. The British pound settled at $1.578, less than late Monday’s $1.584.

Other Markets

Early in trading, equities looked as if they were heading lower for the seventh straight session amid worries about the economy. But stocks struggled to emerge from the rut, finally gathering steam only late in the afternoon.

The Dow average rose 17.56 points to 3,415.93. In the broader market, advancing issues narrowly outnumbered declines on the New York Stock Exchange. Big Board volume came to 284.14 million shares, up slightly from the previous session’s 283.26 million.

“We got a little bit of bottom fishing,” said John Blair, head trader at NatWest Securities. “We had a rally in health care stocks, and that carried over to some banks.”

Analysts said the market was also boosted by the consumer confidence report.

“The economy is growing, but we’re not sure how strongly,” said Guy Truicko, a portfolio manager at Unity Management. He said recent weakness in retail sales was tied to bad weather.

Among the market highlights:

* Merck rose 1 1/4 to 37 3/8, Schering-Plough added 2 3/8 to 68, and Abbott Labs gained 1 5/8 to 28 1/4.

* Within the banking group, Wells Fargo jumped 4 1/8 to 106 3/4, Citicorp rose 5/8 to 26 1/2, Chemical Banking gained 1 to 37 7/8, and BankAmerica gained 1 1/8 to 45 3/8.

* Intel, which slid Monday on concerns about pricing of rival products, rebounded 4 5/8 to 92.

* Cirrus Logic slumped 6 to 14 1/2 after reporting disappointing fourth-quarter earnings.

* Pepsico was the most active NYSE stock, off 5/8 to 36 5/8 after its first-quarter results were less than expected.

In overseas trading, Japanese stock prices ended sharply higher, with Tokyo’s Nikkei 225-share average closing up 583.08 points, or 2.97%, to 20,206.71. Share prices also rose on the London stock exchange. The 100-share average was up 10.4 points, or 0.36%, to 2,832.7. Frankfurt’s 30-share DAX ended 9.03 points down at 1,640.78.

Meanwhile, in commodities trading, gold futures fell moderately on New York’s Commodity Exchange after climbing to a nine-month high on Monday. Gold for current delivery fell $1.60 an ounce to $351.20 Tuesday. Silver for current delivery advanced 2.2 cents an ounce to $4.087.

On the New York Mercantile Exchange, light, sweet crude oil for June delivery fell 12 cents to $20.18 a barrel.

Market Roundup, D6