Bonds, stocks drop as reports stoke inflation fears

October 21, 1994|By Bloomberg Business News

NEW YORK -- U.S. bonds tumbled yesterday, pushing stocks and the dollar lower, after reports of brisk growth aroused concern that this year's interest rate increases haven't slowed the economy enough to subdue inflation.

"Obviously, the economy isn't slowing down," said Marcello Frustaci, a trader at Daiwa Securities America. "In some cases, it looks like it's speeding up."

Bonds dropped after reports that housing starts rose 4.4 percent in September and that wholesale prices in the mid-Atlantic region surged earlier this month. The benchmark 30-year bond fell about 1 1/16, or $10.63 per $1,000 bond, pushing the yield to brush 8 percent for the second time since May 1992.

Bonds pared their loss later in the day, and the yield fell to 7.99 percent, from 7.89 percent at Wednesday's close. Bond yields also reached 8 percent on Oct. 6, the first time they had crossed that threshold in 2 1/2 years.

Treasury losses were compounded by a falling dollar, which makes dollar-denominated securities such as bonds less attractive. The dollar fell to 97.13 yen from 97.40 yen and to 1.4929 German marks from 1.5015 marks, after earlier reaching a two-year low of 1.4900.

Shortly after trading opened this morning in Tokyo, the dollar slumped to 96.55 yen, a record low.

The Dow Jones industrial average fell as much as 41.38 yesterday, to 3,894.66, taking it below 3,900 for the first time in a week and more than erasing the 25.57-point gain accumulated so far this week. The Dow later regained some ground and closed at 3,911.15, down 24.89.

The drop in bonds reflects a growing perception that the Federal Reserve can't afford to wait past its next policy meeting on Nov. 15 to raise interest rates for the sixth time this year, traders said.

And some said the Fed has missed its opportunity to raise rates fast enough to ensure inflation doesn't accelerate.

The Fed's measured response "makes you want to bang your head on your desk," said Gerald Thunelius, who manages $1.7 billion at Dreyfus Corp. in New York. "You have to wonder why they don't get out ahead of the inflation curve."

Prices of commodity futures surged after the housing report, suggesting that inflation, which erodes the value of fixed-income securities, is accelerating. The Commodity Research Bureau's index of 21 leading commodities rose 2.74, to 233.91.

Stocks followed bonds lower as the prospect of higher rates clouded better-than-expected earnings at three of the nation's leading companies -- International Business Machines Corp., Microsoft Corp., AT&T Corp. -- and improving results at Coca Cola Co. and McDonald's Corp.

"It's one of those good news, bad news days," said Hugh Johnson, chief investment strategist at First Albany Co. "There's a continued battle in the trenches between better earnings and worries about a strong economy."

Losses in General Motors Corp., Procter & Gamble Co. and General Electric paced the decline.

Among broader market measures, the Standard & Poor's 500 index fell as much as 4.89, to 465.39, its biggest one-day decline since a 7.15-point drop on Oct. 4. Later gains took it to 466.85, down 3.43. Slumping shares of auto, telephone and electrical equipment companies erased gains in computer software, gold and aluminum issues.

Gold stocks, a traditional hedge against inflation, were among the biggest advancers yesterday. The S&P gold index of five stocks climbed as much as 6.01, to 251.43.

The Nasdaq composite index fell as much as 5.13, to 765.49, giving up most of its 5.81-point advance Wednesday, then climbed partway back, closing down 2.38, at 768.24.

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