Interest Rate Fears Jolt Stocks, Bonds

Market Overview

* Long- and short-term interest rates surged Thursday amid speculation that the Federal Reserve Board will nudge short-term interest rates higher.

* The stock market backed away from highs as uneasiness about interest rates gave investors an excuse to sell and collect profits.

Credit

The Treasury’s 30-year bond yield rose to 6.31% from 6.28%, pushing prices, which move in the opposite direction, down 13/32 point, or $4.06 per $1,000 in face value.

Meanwhile, interest rates on short-term Treasury bills--which would be most directly affected by any change in short-term interest rates--soared.

Stirring speculation among bond traders was the Fed’s failure to add reserves to the banking system as expected, shortly before noon Thursday.

The central bank routinely adds reserves to help set the federal funds rate, the interest charged on overnight loans between banks. The perceived target for the rate has been 3% since September, 1992.

Since the federal funds rate rose as high as 3.5% on Thursday morning, the Fed’s failure to intervene was seen by the market as a sign it wants to push the rate a quarter of a percentage point above the current target, to 3.25%.

The rate closed at 3.063% on Thursday, down from 3.25% on Wednesday.

Stocks

Stocks got off to a weak start and remained depressed all morning and into the early afternoon. But the profit taking subsided later and the Dow Jones industrial average, as well as broader market indicators, finished well above their worst levels of the session.

The Dow industrials closed off 7.88 at 3,967.66 on Big Board volume of 318.35 million shares. It had been down more than 20 points during the day. In the broader market, declining issues outnumbered advances by about 4 to 3 on the New York Stock Exchange.

Reports of solid sales during January by the auto industry helped steer the market out of its selloff.

Ricky Harrington, senior vice president and technical analyst at Interstate/Johnson Lane, linked the market’s afternoon improvement to the car makers’ reports.

“Until the news came out on the autos, this was a normal day of profit taking amid some uneasiness about interest rates,” he said.

The market’s pullback was not surprising given its prolonged advance. Market analysts said investors decided to take profits when interest rates bobbed up in the bond market.

Weakness in stocks overseas set a negative tone for Wall Street. In Frankfurt, a wave of selling triggered by the Bundesbank’s decision to leave interest rates unchanged pushed the DAX-30 average down 32.29 points to close at 2,151.72. London’s Financial Times 100-share average finished 28.8 points lower at 3,491.5. Stocks also closed lower in Paris and Zurich.

Tokyo’s 225-share Nikkei average closed at 20,174.82, down 75.21 points.

Among the market highlights:

* Woolworth fell 1 1/4 to 24 5/8 after reporting that its January same-store sales rose 2.2%. But it said its fiscal fourth-quarter earnings will be well below those of a year earlier.

* Wal-Mart rose 3/8 to 28 1/8 on heavy volume. The stock’s investment rating was raised to “strong buy” by Kidder Peabody.

* Other retailers were active after posting their January sales reports. Best Buy rose 1 5/8 to 50, Gymboree gained 1 1/4 to 39 1/2 and U.S. Shoe fell 1/4 to 12 1/2.

* Among cyclical stocks, Alcoa dropped 1 to 78 1/4 and Deere shed 1 1/8 to 80 1/2.

* Weak financial shares included J.P. Morgan, off 1 to 70 7/8, and Federal Home Loan Mortgage Corp., down 1 3/8 to 57 5/8.

* Computer chip makers were also weak. Cowen & Co. downgraded Intel to “buy” from “strong buy,” citing uncertainties stemming from recent legal setbacks. Intel fell 2 to 63 1/4 and Motorola dropped 1 7/8 to 99 1/4.

* The Big Three posted gains on the strength of the January sales report. General Motors climbed 1 1/2 to 63, Ford was up 1 5/8 to 69 3/8, and Chrysler rose 1 1/4 to 62 1/2.

In other markets:

* The dollar rose against most major currencies as traders speculated that the Fed may boost short-term interest rates.

* Gold closed on the New York Merc at $387.30 an ounce, up $2.60. Silver continued to rise, gaining 13 cents to $5.465 an ounce.

Market Roundup, D6