Dow Decline Continues; Yields Rise to 4-Month High

January’s stock-market advance continued to erode Monday as bond-market interest rates shot to a four-month high in nervous trading before today’s release of a pivotal report on inflation.

The Dow Jones industrial average fell 35.79 points to 6,660.69, putting the blue-chip index about 223 points below the record of 6,883.90 set on Jan. 21.

In the inflation sensitive bond market, the price of the benchmark 30-year Treasury dropped, raising its yield to 6.94% from 6.89% on Friday.

The last time the yield closed higher was on Sept. 24 when it stood at 6.99%. Bond yields of 7% or so tend to draw funds away from stocks.

“What’s significant is that at 7%, the yield on bonds is clearly competition for stocks,” said Alan Ackerman, market strategist at Fahnestock & Co.

A sustained rise in interest rates could change the character of the market, which has seen stocks move in tandem with bonds. Instead, some strategists are now recommending not only avoiding new investments in stocks, but actually shifting assets in favor of alternatives.

“We’ve had a whale of a bull market, and from my work it looks like we should have a rest,” said John Wosczyna, market strategist at Roney & Co.

“For me, to sell stocks here and buy bonds is a good decision,” he said, adding that he thought stocks had already peaked or would do so in the next several weeks.

Analysts said the market’s focus will be on today’s report by the Labor Department on the employment cost index for the fourth quarter.

Consensus estimates were that the index rose 0.9%. Should it come in stronger than a 1.0% rise, analysts said that could spark a sharp sell-off in bonds and sharply higher yields.

Investors would likely view a sharp rise in labor costs as helping to persuade the Fed, the nation’s central bank, to raise short-term rates at its next meeting in February in a bid to ward off inflation.

While the Dow’s decline has narrowed since it fell 59 points Friday and 94 points Thursday, the performance in the broader market showed signs of deterioration as declining stocks swamped advances. The Dow lost 34 points Wednesday.

Declining issues outnumbered advancers by nearly a 2-to-1 margin on the New York Stock Exchange.

The Nasdaq composite index fell 11.02 points to 1,352.81; the Standard & Poor’s composite index of 500 stocks fell 5.50 points to 765.02, and the NYSE composite index of all listed common stocks fell 2.73 points to 402.78. The average share was down 28 cents.

Among Monday’s highlights:

* Weakest among the 30 Dow components was IBM, which fell 4 3/4 to 145 3/4, bringing the drop to 23 points in the last four sessions.

* Measurex surged 10 1/4 to 34 1/2 after agreeing to be acquired by Honeywell for $35 per share in cash. Honeywell fell 5/8 to 69 3/8.

* Software Spectrum tumbled 10 1/2 to 23 in the first day of trading since the company warned late Friday of weak quarterly earnings.

* Lackluster quarterly results for Eli Lilly, off 2 1/4 to 80 3/8, paced a retreat among drug makers. American Home Products declined 1 3/4 to 59 3/4 and Johnson & Johnson fell 1/2 to 54 5/8.

Overseas, Tokyo’s Nikkei stock average fell 2.0%, Frankfurt’s DAX index fell 0.1%, and London’s FT-SE 100 fell 0.2%.