Bond Yields Drop, Dow Up on GDP Report : Market Overview

Treasury bond yields flirted with 16-year lows on news that the economy grew at a sluggish pace in the second quarter.

* Stock prices climbed, carrying the Dow Jones average within a point of its all-time closing high, given a boost by plunging interest rates.

* Gold futures prices neared a three-year high as investors, unnerved by European currency instability, sought safety in precious metals.

Credit

As yields tumbled, investors seeking higher returns helped drive up stock prices, pushing the Dow Jones industrial average just shy of an all-time record.

The Treasury’s key 30-year bond yield skidded to 6.57% from 6.65% late Wednesday. Its price, which moves in the opposite direction, spurted 1.188 point, or $11.88 per $1,000 in face value.

The bond yield’s record low was set on July 19 when it closed at 6.54%, its lowest since the Treasury began regularly auctioning 30-year bonds in 1977.

The Commerce Department reported the U.S. economy grew at a disappointingly modest 1.6% annual rate in the April-June quarter despite a rebound in consumer spending.

Bond investors also were cheered by a 2.6% annualized increase in a measure of inflation tied to the GDP. The meager second-quarter rise was less than the 4.3% rate increase in the first quarter.

The news set off a spree of bond buying as investors reasoned that the Fed would be hard-pressed to raise interest rates any time soon in the climate of slow growth and low inflation.

Stocks

The buying binge in the bond market allowed investors to shrug off the GDP report.

Several futures-related buying programs lent support to the fairly broad-based advance on Wall Street.

After periodically trading above its record closing level, the Dow ended with a gain of 13.97 at 3,567.42, just shy of the record 3,567.70 finish established on Monday.

In the broader market, advancing issues outnumbered declines on the New York Stock Exchange by about 12 to 7. Big Board volume came to 266.55 million shares, down slightly from 273.10 million traded Wednesday.

“When the GDP came out this morning, the long-term bond market began to rally. It basically took the stock market with it,” said Ned Collins, head of trading at Daiwa Securities America Inc.

Foreign markets mostly moved higher.

Tokyo’s 225-share Nikkei average shot up 627.27 points to 20,456.85, and London’s Financial Times 100-share average ended 33.4 points higher at 2,917.6. In Frankfurt, the 30-share DAX average ended down 0.21 at 1,833.70.

Back at home, the bond rally did not completely divert the stock market’s spotlight away from corporate financial results. Also, a number of “buy” recommendations issued by brokerages attracted investors.

* Companies issuing quarterly figures included General Motors, which gained 1/2 to 47 1/2. The auto maker said it earned 92 cents a share in the second quarter, a big improvement from a year earlier when GM recorded a per-share loss of $1.18. Other automotive stocks also rose.

* One loser among the blue chips was Disney, which went down 1 1/8 to 38 5/8.

* Hefty gains in the stock market were garnered by financial stocks, including some insurers and a handful of Dow issues such as Allied-Signal, winning 2 1/2 to 71 3/8, Eastman Kodak, advancing 1 1/2 to 53 7/8, J.P. Morgan, gaining 1 1/4 to 73, and McDonald’s, up 1 to 52 1/8.

* Among insurance stocks that advanced, General Reinsurance rose 5 3/8 to 124 1/8, American International added 3 to 137 7/8 and Transamerica gained 1 1/2 to 56 1/8.

* Mutual fund firm T. Rowe Price jumped 4 to 54 after reporting a rise in second-quarter profits.

Other Markets

Gold rose after the German central bank decided not to cut its key interest rate and said it would continue to pursue a cautious policy as far as future rate cuts are concerned. It was widely expected that Germany would slash rates to help stimulate sluggish European economies.

On New York’s Commodity Exchange, gold bullion for current delivery settled at $397.80 an ounce, up $4.40 from Wednesday. silver traded late at $5.204 an ounce, up 5 cents from Wednesday.

In New York, the dollar traded late at 106.45 Japanese yen and 1.741 German marks, up from 105.80 yen and 1.717 marks respectively late Wednesday. The British pound traded late at $1.483, down from $1.497 late Wednesday.

Market Roundup, D6