Bond Yields Zoom on Economic News

Looks like the bond market cares about unexpected signs of economic strength, after all.

Bonds’ brisk rally of recent weeks was rudely interrupted Friday, as long-term yields surged from Thursday’s 18-month lows on news of surprisingly robust economic data.

But the turnaround in bonds didn’t throw stocks for much of a loop: The Dow Jones industrials sustained a loss of between 100 and 120 points for much of the day, then rallied in the final minutes to finish off just 28.57 points at 8,194.04.

The broad stock market finished mostly lower, but only modestly so. The New York Stock Exchange composite index dipped 3.52 points, or 0.7%, to 490.98--and for the week still was up nearly 1%.

For the bond market, however, Friday’s jolt confirmed that many traders and investors remain paranoid about any sign of a significant rebound in the economy that might revive inflation and-or push the Federal Reserve Board to tighten credit again.

Friday’s news of stronger-than-expected job creation in July, and a healthy report on manufacturing activity from the National Assn. of Purchasing Management, “brings [Fed Chairman Alan] Greenspan back onto the radar screen,” said Edward Rydwelski, an analyst at CNA Insurance Cos. in Chicago.

The reports sparked selling that left the 30-year Treasury bond yield at 6.45% at the close, up from Thursday’s 18-month low of 6.30%. It was the biggest setback for bond prices in more than a year.

Shorter-term yields also climbed. The two-year T-note yield jumped to 5.88% from 5.74%.

Particularly unnerving to some traders was the part of the NAPM report that showed that industrial activity and prices paid by manufacturers both registered unexpectedly sharp increases in July.

“People want to buy into this ‘nirvana’ mentality,” said Tom Seay, who helps manage about $750 million at Lexington Management Co. in Saddle Brook, N.J. “They’re going to have to start realizing there are pressures building, and if you wait for inflation to appear, you’ll be too late.”

The sudden nervousness in the bond market comes just ahead of the Treasury’s quarterly refunding next week, when it will sell $38 billion of three-year, 10-year and 30-year bonds.

If bond traders left for the weekend in a foul mood, however, stock traders seemed largely unfazed by Friday’s action.

Most stock indexes lost minor ground, even though losers topped winners by 18 to 11 on the New York Stock Exchange.

And the Nasdaq composite index actually inched up 0.52-point to a record 1,594.33, as some major tech issues rose.

“The bull continues, because all this [economic news] does is make it look like the recovery is going to be stretched out and last well into 1998,” argues Stanton Feeley, chief investment officer at SunAmerica Asset Management in New York. “That’s good for stocks.”

But other analysts warn that if yields continue to climb, stocks aren’t likely to take it in stride.

Among Friday’s highlights:

* Financial stocks pulled back as bond yields rose. Fannie Mae fell 88 cents to $46.38, Wells Fargo lost $4.06 to $270.88 and Merrill Lynch eased 38 cents to $70.06.

First Chicago NBD bank lost 31 cents to $75.56 after trading as high as $78.19 on rumors that BankAmerica may make a takeover bid. BankAmerica fell $1.38 to $71.13.

* Industrial issues that would fare better in a stronger economy helped buoy the Dow. GM soared $2.56 to $64.44, Caterpillar jumped $2.94 to $58.94 and International Paper leaped $1.63 to $57.75.

Likewise, semiconductor issues were strong, led by Intel, up $1.81 to a record $93.63; Texas Instruments, up $6.88 to a record $121.88; and Micron, up $2.13 to $50.63.

* Kellogg jumped $5.56 to $97.44 after reporting strong earnings.

In foreign trading, Japanese stocks suffered another big setback, with the Nikkei-225 index slumping 527.05 points, or 2.6%, to 19,804.38. Trading had been interrupted in the morning by a major computer glitch.

In currency trading, the latest U.S. economic reports boosted the streaking dollar to near an eight-year high against the German mark. The dollar bought 1.863 marks, up from 1.838 Thursday.

Market Roundup, D4

Work Force Increases: In July, unemployment dipped to 4.8%, and industry payrolls added 316,000 jobs, U.S. survey finds. A1

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Rate Whiplash

Bond yields surged on Friday from Thursday’s 18-month low, as economic data pointed to unexpected strength. Daily closes of the 30-year Treasury bond since July 1:

Friday: 6.45%

* Source: Bloomberg News

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