FINANCIAL MARKETS : Dow Breaks 4,400 but Bond Rally Reverses
The bond market staged a dramatic reversal Wednesday, as a shockingly poor reception for the Treasury’s auction of 10-year notes sparked a wave of profit taking that sent yields surging.
Stocks, however, virtually ignored bonds’ turmoil, and the Dow Jones industrial average rose 13.84 points to a new high of 4,404.62 in active trading.
The spotlight was focused on bonds, which until midday Wednesday had been in a powerful weeklong rally that had driven yields down to 13-month lows.
The sentiment that had sparked the latest bond rally--investors’ confidence that the U.S. economy is slowing markedly--remained in force early Wednesday, after the Federal Reserve Board reported that its “beige book” survey of regional business activity showed a decelerating economy.
The yield on the 30-year Treasury bond, which had already fallen from 7.35% on May 1 to 6.94% by Tuesday’s close, dove to 6.86% by midday Wednesday as investors and speculators continued to pour into bonds.
But the rally hit a brick wall after the Treasury released results of its quarterly auction of 10-year notes. Bids totaled just $20.9 billion for the $12.5 billion in notes offered, the lowest level of bidding at a 10-year note auction since August, 1990--immediately after Iraq invaded Kuwait.
Investors demanded an average yield of 6.608% on the notes, well above the 6.56% expected.
What’s more, many Wall Street dealers that had bid at the high end for the notes--hoping to price themselves out of the market, so they wouldn’t have to buy--wound up stuck with notes anyway. The highest yield bid was 6.68%, and the Treasury filled 92% of the bids made at that yield.
For bond dealers, “it’s like a sucker punch when you get hit with that,” said Robert Brusca, economist at Nikko Securities.
The fallout quickly spread across the bond market, as investors and traders dumped securities that many had been seemingly happy to buy just hours earlier.
The 30-year T-bond yield soared from 6.86% at midday to 6.99% at the close.
The yield on five-year T-notes, which had started the day at 6.30%, plunged as low as 6.23% then zoomed in the afternoon to finish at 6.38%.
How could the auction go so poorly in the wake of the past week’s huge rally in bonds?
Some analysts said the speculative frenzy that had overtaken the market had simply pushed longer-term yields far below levels that were reasonable, given the strong likelihood that the Federal Reserve Board won’t cut short-term interest rates any time soon.
“What the auction said was that the market way overshot the fundamentals,” said David Jones, economist at bond dealer Aubrey G. Lanston & Co. in New York.
As soon as the downward trend in yields reversed, many speculators who had been riding that trend cashed out, and longer-term investors were unwilling to step into the void until yields backed up.
Perhaps surprisingly, traders said early talk that Japanese investors would stay away from the auction proved false. “Asian accounts in general were much better buyers” than some U.S. investors, said one bond trader.
The bond market faces a key test today, when the government reports on April wholesale inflation. Some traders say a lower-than-expected number could easily revive the bond market rally.
Meanwhile, the stock market seemed oblivious Wednesday to bonds’ reversal. Winners topped losers by 6 to 5 on the New York Stock Exchange and most broad market indexes closed marginally higher or slightly lower.
Among Wednesday’s highlights:
* U.S. auto stocks jumped, helped by expectations of lower auto loan rates and by the government’s move to seek sanctions against Japanese auto makers, in retaliation for Japan’s alleged restrictions on U.S. auto imports. The move could make Japanese cars more expensive in the United States.
GM shot up 2 1/4 to 46, Ford gained 1 1/4 to 28 3/8 and Chrysler surged 1 3/4 to 43 5/8.
On the flip side, U.S.-traded shares of Japanese auto makers tumbled. Honda fell 1 1/2 to 31 1/2, Toyota lost 1 1/8 to 39 and Nissan Motor dropped 1 to 13 1/2.
* Steel stocks, recently depressed, rose on news that steel imports have been falling while demand remains reasonably strong. USX-U.S. Steel jumped 1 1/2 to 31 3/8, Nucor leaped 2 1/8 to 48 3/8 and Bethlehem gained 5/8 to 14 7/8.
* Some interest-rate-sensitive stocks rose despite bonds’ failed rally. Federal National Mortgage zoomed 3 1/4 to 92 7/8, Citicorp added 3/8 to 50 3/8 and brokerage Salomon gained 1 1/4 to 39.
* Many tech issues also continued to advance. Hewlett-Packard was up 1 1/8 to 68 1/8, Advanced Micro Devices jumped 1 1/4 to 37 1/8 and Lotus leaped 1 3/4 to 34 1/4. But Intel lost 2 1/2 to 108 3/4.
* On the downside, some recently strong growth stocks gave ground. Gillette lost 3/4 to 85 1/8, Disney dropped 1 1/4 to 53 and Merck slid 1 1/8 to 43.
Also, Nordstrom tumbled 2 7/16 to 36 1/8 after it reported disappointing first-quarter earnings.
Overseas markets were mixed. In Tokyo, the 225-share Nikkei average shed 131.73 points to close at 16,826.49. But Frankfurt’s DAX index rose 19.47 points to 2,059.06 and London’s FTSE-100 index surged 28.9 points to 3,290.1, its highest level in 14 months.
Elsewhere, the dollar rallied against the Japanese yen after the Clinton Administration formally announced it will seek trade sanctions against Japan.
In New York, the dollar was quoted at 83.91 yen, up from 83.45 late Tuesday. It also gained against the German mark, rising to 1.388 from 1.382, buoyed by a selloff of marks that traders stockpiled before France’s election.
The Fed announced Wednesday that it spent $1.42 billion on March 2 and 3 buying marks and yen on behalf of the Treasury, in an attempt to stabilize the dollar.
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