NEW YORK -- U.S. stocks advanced yesterday as a rebound in the Treasury market helped ease concern about rising interest rates.
"The bond market stabilized . . . and that gave the market a boost," said John Blair, head trader at NatWest Securities Corp.
The Dow Jones industrial average rose 27.30 points, to 3,783.90, led by gains in Caterpillar Inc. and International Paper Co. The Standard & Poor's 500 Index gained 1.45, to 466.89. Five common stocks were higher for every four that fell on the New York Stock Exchange.
The Nasdaq Combined Index rose for the seventh time in eight days, gaining 3.52, to 774.28. The American Stock Exchange Market Value Index rose 0.12, to 477.36.
Stocks got a boost from bond prices, which rose for the first time in seven trading days. The benchmark 30-year Treasury bond surged 5/8 , or $6.25 per $1,000 bond, to 98 14/32. Much of the gain occurred after Johnson Redbook Service, which surveys retailers, said sales in December fell 0.4 percent from November.
The yield on the 30-year Treasury bond was at 6.36 percent, down from yesterday's 6.41 percent. But the yield is still up almost six-tenths of a percentage point, or 59 basis points, from the Oct. 15 low of 5.77 percent. Rates are hovering at the highest level in 4 1/2 months. The rise in rates is tied to concern that a robust economic recovery could cause the Federal Reserve to boost money-market rates early this year.
"Rates keep going higher, and that's prompting fear that investors may sell stocks and buy fixed-income investments," said Thom Brown, managing director at Rutherford, Brown & Catherwood.
Elaine Garzarelli of Lehman Bros., the prophet of the 1987 stock market crash, turned a hint less bullish on U.S. stocks yesterday in part because of concern about rising money market rates.
"The federal funds rate had been on a steady decline since December 1989," Ms. Garzarelli said. "However, with a stronger economic outlook, further declines will likely be limited." Low interest rates fueled the stock market's advance in 1993. As rates rise, investors' demand for stocks declines.
Allen Jacobson, an analyst who tracks monetary policy for NatWest Securities, said the Fed will take longer to raise rates than many analysts now predict.
"The Fed needs proof that inflation is surging upward before they take any steps to tighten," Mr. Jacobson said. "And they don't have proof." Consumer prices will rise 3 percent, at most, this year, he said.
Shares of computer and drug manufacturers, which underperformed market averages in recent months, rallied yesterday. The S&P Computer Software Index rose 3.56, or 2.6 percent, to 141.65, and the S&P Drug Index gained 15.76, or 1.3 percent, to 1,228.44.
Computer-related issues such as Oracle Corp. rebounded from recent losses. Oracle shares rose $1.625, to $30.125, after falling almost 16 percent in the past two weeks on concern about the earnings outlook. Oracle was added to the "focus" list at S. G. Warburg & Co.
A rally in drug stocks was led by Merck & Co., Syntex Corp. and Pfizer Inc.
Trading was active, with about 326.5 million shares changing hands on the Big Board. Repsol S.A., MCI Communications Corp., Telefonos de Mexico S.A., CML Group Inc. and Topps Co. were the five most actively traded issues.
MCI Communications fell $1.875, to $26.625, after the company said it would invest more than $20 billion to create a high-speed information superhighway, including the construction of local fiber-optic networks in metropolitan areas.
CML Group plunged $4, to $18. The stock slumped for a second session amid concern about sales of its NordicTrack exercise machines. Heidi Steinberg, an analyst at Lehman Bros., reduced her earnings estimate for the fiscal year ending July 31 to $1.33 a share, from $1.38.
Stocks of the nation's carmakers rose amid release of stronger-than-expected vehicle sales for late December and anticipation of the industry's annual trade show this week. General Motors Corp. was added to the CS First Boston "focus" list yesterday. GM rose $1.375, to $56.75, and Chrysler Corp. soared $2.50, to $56. Ford Motor Co. gained 50 cents, to $63.875.
Time Warner Inc. declined $2.25, to $41.875. The entertainment and publishing company's stock was lowered to "buy" from "strong buy" at Alex. Brown & Sons Inc.