Bond Yields Climb on Rate Increase Jitters

Treasury bond yields surged Monday, continuing their rapid ascent of recent weeks, on fears that the Federal Reserve may have to raise interest rates to stop the dollar’s slide against the Japanese yen.

Meanwhile, in a volatile day for markets across the board, the euro currency remained the weakest among the three major currencies, falling to new lows against both the yen and the dollar.

On Wall Street, the stock market ended broadly lower--though it arguably held up well given the latest jump in bond yields.

The Dow Jones industrials eased 40.99 points, or 0.4%, to 10,947.92, while the Nasdaq composite index fell 0.8% after hitting a record 3,447.81 on Friday.

In the bond market, the yield on the bellwether 30-year T-bond jumped to 6.30%, up from 6.23% on Friday and nearing the two-year high of 6.37% reached Oct. 26.

Shorter-term Treasury yields also rose sharply, with the 2-year T-note ending at 6.06%, up from 5.99% Friday and the highest since mid-1997--when the Dow was trading around 7,673, or 30% below its current level.

Traders said the dollar’s steep drop against the yen Friday, to a four-year low of 101.64 from 104.42 on Thursday, gave jittery bond traders another reason to sell Monday morning.

The bond market didn’t respond to a small rebound in the dollar, to 102.35 yen, after Bank of Japan sold $2 billion to $3 billion of yen for dollars and euros, in an attempt to restrain the yen.

The yen has been gaining as investors pump capital into Japan, in a bet that its economy is finally rebounding. Ironically, however, a surging yen could hurt the Japanese recovery by making its exports much more expensive.

The flip side of a rising yen--a weak dollar--raises the risk of higher U.S. inflation because of higher import prices and also may make Japanese investors less interested in U.S. bonds.

Either concern could compel the Fed to raise short-term interest rates again, analysts warned. The Fed has already raised its key rate three times this year in the face of a robust U.S. economy.

But some traders said the bond market is more concerned about this week’s U.S. economic reports than about the dollar-yen situation.

“The data this week are supposed to be strong,” noted William Kirby, a trader at Prudential Securities. The big report will be the November employment data, due Friday.

“Consumer spending is strong, and that is making the market nervous” about another Fed hike, said Carl Ericson, bond manager at Colonial Asset Management in Boston.

While the dollar is struggling versus the yen, the embattled euro is tumbling against both currencies.

The euro ended in New York at $1.010, down from $1.016 on Friday and the lowest since the currency began life Jan. 1.

Currency traders have been hammering the euro on the belief that the European economy’s advance in 2000 will pale compared with the U.S. and Japan. In general, weak economies attract less capital than their rivals and thus often sport weak currencies.

But the euro recouped some ground after falling as low as $1.004 on Monday. It got a small boost after European Central Bank President Wim Duisenberg said the bank wouldn’t rule out intervention to bolster the currency’s value.

Still, “If you ask me whether we will take monetary action” now, Duisenberg said, “the answer will be no.”

In other markets, gold futures tumbled $8.80 to $290.60 an ounce after Bank of England sold about 25 metric tons of bullion below the market price--a surprise in a market where traders thought demand was improving.

Also, oil futures slid 91 cents to $25.96 a barrel in New York on speculation that Iraq will soon return to the export market after stopping shipments a week ago in a dispute over the United Nations-controlled program.

Iraq began filling storage tanks at the Turkish port of Ceyhan on Wednesday, a sign that it will agree to a new six-month round of exports. Iraqi oil minister Amir Rasheed said as much Saturday.

On Wall Street, the big question remains: How high do bond yields have to go before stock investors begin to get noticeably upset?

Major indexes have either continued to advance or have held up surprisingly well in recent weeks despite surging yields.

But analysts noted that the market has been largely a one-sector story: technology.

On Monday, some key tech issues inched up, but overall losers outnumbered winners by more than 2 to 1 on the New York Stock Exchange and by 23 to 18 on Nasdaq.

That underlying weakness in the broad market is a dangerous trend, many experts say, because if tech stocks were to run out of steam, there may be no other sector to support the market’s advance.

Among Monday’s highlights:

* Interest rate-sensitive financial and utility issues continued to sink. Bank of America fell $3.56 to $56.94, Chase Manhattan lost $2.13 to $76.94, and Merrill Lynch slid $3.75 to $79.56.

* The Dow utility index slumped 1.6% to 276.94, a new 52-week low.

* Internet stocks took a break. EBay fell $7.56 to $169.63, America Online lost $4.38 to $79, and Amazon.com lost $2.69 to $90.44.

* Major tech stocks losing ground included Intel, down $1.31 to $78.94, and IBM, off 81 cents to $104.19. But Dell added 81 cents to $43.75 and Sun Microsystems rose 75 cents to $136.81.

* AT&T; rose $2.56 to $60 after Salomon Smith Barney analyst Jack Grubman raised his rating to “buy” from “neutral,” citing an expected payoff from AT&T;’s upgrade of its cable systems.

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Market Roundup, C15

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Up and Away

The yield on the two-year U.S. Treasury note, a security highly sensitive to expectations for Federal Reserve interest rate moves, jumped above 6% Monday--the highest since mid-1997.

Monday:

6.06%

Source: Bloomberg News