Wednesday, February 24, 1999
Stocks Turn South
As Treasury Yields
Surge After Auction
By TERRI CULLEN
INTERACTIVE JOURNAL
Stocks headed south in the last hour of trading Wednesday, as bond yields soared in reaction to a weak Treasury auction. Technology and transportation shares struggled to hold on to sharp early gains.
The Dow Jones Industrial Average was down 33 points to 9512 after rising in afternoon trading as much as 55.71 -- just 43 points shy of its all-time high. The industrials gyrated Tuesday after receiving mixed signals on the direction of interest rates from Federal Reserve Chairman Alan Greenspan, with the average sinking 79.44 at its low before recovering to finish the day down just 8.26.
The Standard & Poor's 500-stock index slipped 1.20 to 1270 late Wednesday, after surpassing its closing high of 1279.64 set on Jan. 29 earlier in the session, and the New York Stock Exchange Composite Index eased 0.70 to 597.40.
With the help of its dominant technology group, the Nasdaq Composite Index barely managed to hold on to its early gains, rising 8.70 to 2385.01. The Morgan Stanley high-technology index climbed 3.80 to 987.60.
Stocks had posted their best performance of the day immediately after Mr. Greenspan concluded the second round of his two-day Humphrey-Hawkins testimony Wednesday without further jangling nerves in the market about interest rates or high stock valuations.
On Tuesday, the Fed chairman, speaking before the Senate Banking Committee, indicated he is evaluating whether last year's interest-rate cuts remain "appropriate" to current conditions. Mr. Greenspan also warned that stocks may be overvalued. His remarks spooked blue-chip investors, who sold off shares on fears of a steep market slide. But when the broader market, and volatile technology shares in particular, held their ground, the Dow industrials rallied back from their lows.
Wall Street's calm reaction to Mr. Greenspan's somewhat negative tone Tuesday set the stage for Wednesday's early advance, said Alan Ackerman, senior vice president of Fahnestock & Co. "The first set of Greenspan's Humphrey-Hawkins comments have given many the sense that we've heard just about everything we're going to hear for the moment on the interest-rate environment, and from what little we've heard the Fed doesn't feel too strongly about changing rates one way or the other," he said.
But that wasn't how his remarks were taken in the bond market, where the bellwether 30-year Treasury bond plunged in response to a poor showing at a Treasury Department auction of $15 billion of two-year notes. The yield, which moves in the opposite direction of the price, of the benchmark bond soared to 5.5% -- a level which sparks concerns on Wall Street about higher corporate borrowing costs and eroding profits.
Demand for the new notes was surprisingly weak, traders said. The Treasury awarded $15 billion of notes at a high rate of 5.009%, up from 4.575% at the previous two-year note auction, on Jan. 27. The Treasury accepted $1.16 billion of noncompetitive tenders, down from $1.22 million Jan. 27. The bid-to-cover ratio, an indication of demand, dropped to 1.83. The ratio was above 2.0 at the last three auctions.
Joseph Liro, chief economist at Stone & McCarthy Research Associates in Princeton, said the weak auction triggered a wave of selling that caught the market by surprise. "We were all a bit taken aback because Greenspan didn't say anything else [Wednesday] that would raise red flags in the market about interest rates. But from the response to the auction you wouldn't know it," he said. "People are obviously less-than-convinced that rates are going to remain steady and they're moving wholesale into the short-end of the market."
Meanwhile on Wednesday, Mr. Greenspan denied speculation the U.S. central bank is manipulating the bond market, instead of directly raising interest rates, in order to tighten monetary conditions. The Fed chairman, responding to questions from House Banking Committee members during the second day of his congressional testimony, said: "We don't endeavor to manipulate the bond market to act as a proxy for the Federal Reserve. The major reason is we wouldn't know how."
Fed officials have increasingly expressed anxiety that the U.S. economy is growing too fast, and have hinted interest rates may eventually need to be raised. But such a move could hurt stock prices and potentially stall the economy. As a result, some financial experts have speculated that the Fed may indirectly seek a tightening in monetary conditions through the bond market.
Rate-sensitive bank and financial-services shares led the stock market sell-off. American Express tumbled 3 1/4 to 08 3/8 to lead the industrials' decline, while the Keefe Bruyette & Woods bank-stock index sank 20.40 to 814.40.
But transportation stocks continued to outperform, with the Dow Jones Transportation Average up 1.1%, or 37, to 3258.70. FDX -- the parent company of express-delivery service Federal Express -- climbed 3 11/16 to 93 9/16 after Schroder & Co. raised its investment rating to "outperform significantly." And Delta Air Lines rallied 2 1/2 to 60 7/16 after Merrill Lynch & Co. named the stock its "Focus One" stock of the week.
World-wide, stocks fell in dollar terms. The Dow Jones World Stock Index was down 0.96 to 202.80 as of 3 p.m. EST.
In major market action:
Stocks weakened. On the Big Board, where 655 million shares traded, while 1,650 stocks fell and 1,290 stocks rose.
Bonds plunged. The 30-year bellwether Treasury bond was down more than 1 1/4, or $12.50 per $1,000 bond. Its yield, which moves in the opposite direction of its price, stood at 5.51%.
The dollar strengthened. In New York, it traded at $1.0972 to the euro and 121.77 yen to the dollar, compared with $1.1008 to the euro and 120.92 yen.
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