The Treasury market reversed course Thursday, with bond yields ending higher after initially retreating on news of an unexpected plunge in October wholesale inflation.
Stocks closed lower on the higher bond rates and concern over the possibility of tax cuts and a larger federal budget deficit.
The bond market setback suggested that bearishness runs deep among fixed-income investors. After weeks of economic data indicating an uptick in inflation, players apparently decided that one more set of statistics would not deter the Federal Reserve from an expected hike in interest rates.
The yield on the Treasury's main 30-year bond rose to 8.15% from 8.11% Wednesday. Its price, which falls when yields rise, ended down 7/16 point, or $4.38 per $1,000 in face value.
The Dow Jones industrial average ended 9.76 points lower at 3,821.99. Big Board volume totaled 282.10 million shares, down from Wednesday's 337.89 million. Declining issues outnumbered advancers by about 5 to 3 on the New York Stock Exchange.
The Labor Department's report of a 0.5% plunge in the producer price index in October initially surprised Wall Street analysts, who had expected a modest increase of around 0.2% in October.
The news reassured some investors and traders following weeks of reports that the economy grew robustly into the fourth quarter, suggesting higher inflation.
Bonds pay a fixed rate of return and tend to decline in price when inflation rises.
However, some market players decided the wholesale inflation news was mixed. Excluding auto, energy and food prices, the rate would have increased 0.1%, roughly within expectations.
Also pressuring the bond market were reports that Wall Street dealers who had bought new three- and 10-year notes in Treasury auctions this week exploited the early rally to sell the securities and take profits.
Stocks shot up nearly 30 points in the morning after the unexpected drop in producer prices. The rally halted, however, pulled down by rising bond yields, when Texas Republican Bill Archer, incoming chairman of the House Ways and Means Committee, said he favors cutting taxes.
His comments raised concerns of a larger budget deficit.
A weakening of computer stocks depressed broad-market indexes, which are heavily weighted toward technology issues. The NYSE's composite index fell 0.66 point to 254.35. The Standard & Poor's 500-stock index declined 1.03 points to 464.37. The Nasdaq composite index slid 2.87 points to 764.38.
Among individual issues:
* Telefonos de Mexico dropped 4 3/4 to 51 1/4 in U.S. trading after AT&T Corp. Wednesday unveiled a $1-billion telecommunications joint venture with Mexican industrial group Grupo Alfa.
* Sears, Roebuck jumped 2 3/4 to 51 5/8 on news that it plans to divest its 80.1% stake in Allstate Corp. to shareholders. Allstate slipped 3/4 to 24 1/8.
* Semiconductor stocks fell after the industry's book-to-bill ratio fell October. Texas Instruments lost 2 to 76 3/4, Micron Technology fell 1 1/4 to 39 5/8 and Intel dipped 1/8 to 61 1/8.
* Genentech shares fell after the company said it was the target of a widened government inquiry, then recovered amid speculation of a buyout by parent company Roche Holdings Inc. Genentech shares ended down 1 3/4 at 46 1/2.
* First Alert tumbled 1 7/8 to 17 1/8 after the company said it postponed a public offering.
* Mail-order retailer Lands' End Inc. shed 1 3/8 to 16 7/8 on disappointing third-quarter profits.
Stocks closed mostly lower in overseas trading. Tokyo's 225-share Nikkei average ended off 159.03 points at 19,264.85. In Europe, the Frankfurt DAX 30-share average closed at 2,082.40, down 14.07 points, while London's Financial Times 100-share average gained 3.9 points to finish at 3,103.5.
Elsewhere, the dollar finished higher against most major currencies, closing at 1.530 German marks in New York, up from 1.5273 Wednesday. It fell to 97.78 Japanese yen from 97.81.