Dow loses 7 points as bonds slump


August 28, 1993|By Bloomberg Business News

NEW YORK -- A slump in bond prices yesterday raised yields from all-time lows and put a damper on the stock market's record-setting rally.

The Dow Jones industrial average lost 7.55 points, to 3,640.63, but it erased most of its losses in the final hour, after having fallen as low as 3,624.98. The decline was led by International Paper Co., Aluminum Co. of America, Exxon Corp., and Chevron Corp.

For the week, the Dow was up 25.15 points. The Dow had set six highs in the past two weeks, culminating in Wednesday's close of 3,652.09.

"With bonds having hit euphoria and giving back a little bit, it caused everyone to be a little nervous," said Edward Collins, executive vice president of institutional trading at Daiwa Securities America. "People feel we went up pretty far, pretty fast."

When interest rates rise, stocks become less attractive relative to fixed-income securities. This is particularly so for the stocks of electric utilities, whose main allure is relatively large dividend income.

Reflecting this shift, yesterday's decline was led by stocks that have above-average payouts or that benefit from falling interest rates -- like financial services companies, banks and utilities. Oil and regional Bell operating companies, which have led the market higher this week, also fell.

Among broader indexes, the Standard & Poor's 500 Index fell 0.50, to 460.54, paced by oil, financial and chemical issues. That index had closed at a record 461.04 Thursday.

The Nasdaq Combined Composite Index bucked the trend for the second straight day. The index, which eased 2.27 Thursday amid a rout in computer networking and data-base software stocks, yesterday rebounded 2.68, to 734.07, thanks to gains in cable television and cellular stocks. The Nasdaq closed at a record 735.14 Tuesday.

The Dow Jones utilities average fell 0.66, to 254.09, after Thursday's record closing high of 254.75. Southern Co. fell 37.5 cents, to $43.875; Texas Utilities eased 62.5 cents, to $49.125; and Pacific Gas & Electric lost 25 cents, to $36.

"The stock market has been following the bond market, and bonds are down," said Kenneth Ducey, head trader at BT Brokerage. "The market's run up to new highs, and people are taking some profits off the table."

The economically sensitive components of the Dow were hurt by the German central bank's decision Thursday not to cut its discount rate, a decision that investors think will prolong the recession in Europe, thereby hindering growth in U.S. export markets.

In addition, auto issues retreated from a rally this week that came amid unexpectedly strong mid-August sales of cars and trucks.

GM declined 50 cents, to $47.125, after having risen 6.7 percent earlier this week.

Alcoa fell $1.125, to $75.75, and International Paper dropped $1.375, to $65.625. On Thursday, a Merrill Lynch & Co. analyst lowered his intermediate rating on International Paper to "neutral" and cut earnings estimates because of weak paper prices and slack overseas demand.

Dow Chemical Co. slumped $1.75, to $60.125, after a Dean Witter analyst reduced his rating and cut earnings estimates.

Overall, stocks fell as the yield on the 30-year Treasury bond rose to 6.14 percent, from a record low of 6.09 percent Thursday. Bond prices fell as speculators cashed in after a five-week, 5-point rally.

Short-term notes were also hurt by comments by David Mullins, vice chairman of the Federal Reserve Board. In an interview with a Japanese publication, Mr. Mullins said that the Fed's concern about inflation could not be "extinguished" by a couple of months of good inflation reports.

Declining stocks exceeded advancing issues by a margin of about 8-to-7 on the New York Stock Exchange.

Trading was unusually slow, because many people are on vacation. About 196 million shares changed hands, the first time that trading on the NYSE has failed to reach 200 million shares since May 24.

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