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FINANCIAL MARKETS : Bond Rates Hit 3-Year High on Job Report : Markets: News of employment growth and higher wages convinces many traders that the Fed will raise rates soon. The Dow tumbles 38.

November 05, 1994|From Times Staff and Wire Services

The bond market's horrendous 1994 slump deepened Friday, as a healthy report on October employment sent yields surging to levels last seen in the summer of 1991.

Stock prices also took a hit, with the Dow industrial average sliding 38.36 points to 3,807.52, though in moderate trading.

The October employment news appeared to confirm that the economy continues to grow at a brisk pace, increasing the likelihood that the Federal Reserve Board will raise interest rates for a sixth time this year to dampen business and consumer spending.

Wall Streeters said the most disturbing aspect of the October report was the rise in hourly wages, the biggest one-month gain in 11 years. Because that hinted at higher inflation--precisely what the Fed has been trying to nip in the bud--financial markets now view the Fed's credit-tightening efforts to date as too restrained, and fear sharply higher interest rates ahead.

In reaction, bond yields jumped across the board Friday. The yield on the 30-year Treasury bond surged from 8.10% on Thursday to 8.15% at Friday's close, the highest level since August, 1991. The yield on two-year T-notes broke the 7% barrier, rising from 6.98% on Thursday to 7.03%.

Kathleen Stephanson, economist at DLJ Securities Corp. in New York, said her firm now estimates there is a 60% likelihood that the Fed will push up rates by another half-point soon, and a 40% chance of a full-point hike. The Fed meets Nov. 15.

"I think that one could make a stronger case for a more aggressive move" of a full point, she said. "Quite a few people are drawing that conclusion."

Dejected bond traders, many of whom have been predicting for months that the economy would slow and that bond yields would begin to pull back, conceded Friday that the now year-old bear market in bonds may still not have run its course.

Since the beginning of the year, the surge in market yields has devalued older, lower-yielding bonds by as much as 15%--the equivalent of the Dow index falling 571 points from its current level.

"People pretty much are just recognizing the fact that a bullish rally is not going to happen in the very near future" for bonds, said Dan Bernzweig, trader for Bank Leumi Trust in New York.

"I don't see one single shred of good news for the bond market," said Michael Link, who manages the $232-million Gradison-McDonald Government Bond Fund in Cincinnati. "There's no reason to buy, none whatsoever."

Still, some Wall Streeters argue that bond yields may already reflect the next Fed rate hike. If the economy begins to slow meaningfully by early 1995, the possibility remains that long-term yields could decline or at least stop rising.

In the stock market Friday, prices held up reasonably well most of the day, despite rising interest rates. A flurry of computerized program trades knocked the market sharply lower near the close.

On the New York Stock Exchange, losers outnumbered winners by 15 to 7, though trading volume was an unspectacular 283 million shares. Transportation, utility, medical and high-tech shares were hit hard in the decline.

"We attempted a rally and it failed, so then the traders decided to sell," said Michael Metz, chief market strategist at brokerage Oppenheimer & Co. "This is a market that has great difficulties with high interest rates, rising inflation and anticipation of a move by the Fed to tighten" credit again.

Some traders noted, however, that though the Dow lost 123.14 points, or 3.1%, for the week as interest rates rose, smaller stocks held up better. The Russell 2,000 index of smaller issues eased just 1.40 points to 252.75 on Friday and was off only 0.9% for the week.

Experts say the increasing problem for stocks, despite robust corporate earnings growth this year, is that short-term interest rates in particular are reaching levels that should siphon cash away from the market. Investors can now earn 5.9% on six-month T-bills, for example, a risk-free return that is three points higher than the current inflation rate.

In currency markets Friday, the dollar declined as the Fed refrained from supporting the U.S. currency after two straight days of intervention. In New York, the dollar eased to 97.50 Japanese yen, down from 97.71 on Thursday.

In overseas markets, Tokyo's Nikkei index gained 60.91 points to 19,811.56, while London's FTSE 100 index eased 6.8 points to 3,097.6 and Frankfurt's DAX index added 16.08 points to 2,067.56. In Mexico City, the Bolsa index ignored the U.S. markets' woes and rose 38.57 points to 2,581.64.

* JOB RECOVERY

California's jobless rate fell. A1

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