Long-term bond yields jumped after a Federal Reserve System report hinted at new strength in the economy. Rumors of bond sales by a big investor also hurt sentiment.
* Stocks showed little reaction to the rise in bond yields, as investors focused instead on earnings reports and on falling interest rates in Europe. The Dow eased 8.94 points.
Bond investors were taken by surprise by a survey of mid-Atlantic business conditions by the Federal Reserve Bank of Philadelphia. It showed an increase in manufacturing employment in October, the first gain in five months.
Traders seized on the news as a signal that the economy is stronger than it looks--the implication being that interest rates and inflation may be close to bottoming after three years of decline.
The Treasury's 30-year bond yield soared to 5.92% from 5.82% on Wednesday. Yields on shorter-term securities also rose. The three-year T-note yield jumped to 4.15% from 4.08% on Wednesday.
Analysts said bond investors were also stunned by the German Bundesbank's decision to slash key short-term interest rates again, suggesting that an economic turnaround in Europe may come faster than expected. That too could increase the odds of higher inflation, bonds' No. 1 enemy.
Another factor in the bond selloff, traders said, was the persistent rumor that international investor George Soros is "shorting" bonds--that is, selling borrowed bonds with the goal of buying them back cheaper later, assuming yields rise.
Still, analysts noted that bearish investors have been predicting an end to the downward interest rate spiral for more than a year, and have been consistently wrong.
"It's just probably time for the market to take a rest," said James Rice, president of bond dealer Aubrey G. Lanston & Co.
Stocks closed mixed, with blue-chips off slightly but smaller issues rebounding.
Traders said the market paid relatively little attention to the surge in bond yields. Strong quarterly earnings reports from key companies were more interesting.
By the close, the Dow industrials were off 8.94 points to 3,636.16. But the Nasdaq composite index of mostly smaller issues gained 3.03 points to 771.28.
Analysts said investors were also responding to the latest German interest rate cut, which may set the stage for Europe to emerge from recession in 1994. That could boost demand for American goods.
Meanwhile, the NYSE reported that "short" interest, the number of borrowed shares sold but not yet repaid, was 1.193 billion shares at Oct. 15, down 33 million shares from the record in mid-September. That suggests some bearish traders have given up on the idea of a sharp market decline.
Among the market highlights:
* Better than expected earnings boosted General Instrument, up 3 1/4 to 56; Caterpillar, up 2 3/4 to 85 7/8; Silicon Graphics, up 1 3/4 to 44 3/4; Quaker Oats, up 2 5/8 to 72 1/2, and Perkin-Elmer, up 1 3/8 to 33 3/4.
* On the downside, disappointing earnings clipped brokerage Salomon, off 1 7/8 to 45 1/8; AT&T, down 1 1/4 to 58 3/4; Dow Chemical, off 2 1/2 to 56 3/8; American General, down 2 1/8 to 29 1/2, and Occidental Petroleum, off 7/8 to 19 1/8.
* Technology stocks in general continued to rebound. IBM jumped 1 3/8 to 45 and Apple Computer gained 2 1/2 to 30 1/4.
* Casino stocks stabilized after Wednesday's drop. Circus Circus slid 7/8 to 38 1/4, but Promus added 1/8 to 74 3/4 and Mirage rose 3/8 to 52 3/4.
Overseas, many markets zoomed, primed by the German interest rate cut. In London, the FTSE-100 index soared 32 points to a record 3,188.3. In Paris, the CAC-40 index zoomed 50.04 points to 2,199.72. But Frankfurt's DAX index eased 7.87 points to 2,034.69.
In Mexico City, the Bolsa index jumped 28.46 points to a record 2,011.41, crossing the 2,000 mark for the first time.
Tokyo's Nikkei index lost 6 points to 20,179.42.
In other markets:
* The dollar surged, as Germany's falling interest rates undercut the German mark and other foreign currencies. The dollar closed at 1.669 marks in New York, up from 1.639 on Wednesday, and at 108.35 Japanese yen, up from 107.30.
* Near-term gold futures slipped $1 to $371.70 on New York's Comex; silver eased 1.2 cents $4.51. Oil prices also slipped.
Market Roundup, D6