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Stocks Extend Rally as Investors Sell Off Bonds

Wall Street: Despite midday pullback, major indexes end higher. Treasury yields rising.


Stocks continued to rebound Wednesday, fueled in part by investors dumping bonds in search of better returns.

A fresh sell-off in bonds sent the yield on the 10-year Treasury note, a benchmark for mortgage rates, to 4.53%, up from 4.38% Tuesday and the highest since Oct. 26.

Yet the investors earning the lowest yields--those with cash in money market funds--still don't appear in any great hurry to shift that savings even as rates fall below 2%, data show.

On Wall Street, share prices shot higher early in the day, continuing to gain on optimism about the war effort in Afghanistan and on expectations for an economic recovery in 2002, analysts said.

Despite a midday pullback most major stock indexes closed higher, the fourth advance in five days. The Dow Jones industrial average rose 72.66 points, or 0.8%, to 9,823.61, highest since Sept. 6.

The Nasdaq composite closed up 11.08 points, or 0.6%, at 1,903.19, highest since Aug. 27.

Nasdaq is about 5% below the 2,000 mark, a level it last closed above on Aug. 7. The index has surged nearly 34% since hitting a three-year low on Sept. 21.

Rising stocks outnumbered losers 3 to 2 on the New York Stock Exchange Wednesday and 4 to 3 on Nasdaq. Trading was active.

What has been good for stocks in recent days--rising confidence about the U.S. economy in 2002--has been bad for bonds. Yields on longer-term Treasury securities have been rising since bottoming on Nov. 7 at levels not seen in 40 years or more for some issues.

Some analysts say better-than-expected economic data are causing more bond investors to give up on the idea that rates can go lower. Indeed, there is growing concern in the bond market that the Federal Reserve's 10th rate cut this year, ordered last week, will be its last.

A report Wednesday of a sharp jump in October retail sales, led by the auto sector, "takes away virtually any chance of [another] Fed rate cut," David Jones, economist at bond dealer Aubrey G. Lanston in New York, told Reuters. "The recession will be relatively brief and not as severe as feared."

Under that scenario, money managers may be more inclined to shift assets from bonds to stocks.

The 10-year T-note yield bottomed at 4.18% on Nov. 7 as investors rushed to lock in yields. The rebound since then is expected to drive mortgage rates up from what had been the lowest levels in at least 30 years. Lower rates triggered a record number of mortgage refinancing applications last week, the Mortgage Bankers Assn. said.

Shorter-term Treasury yields also are up this week. The two-year T-note yield on Wednesday posted its biggest one-day jump in three years, surging to 2.72% from 2.5%.

But some analysts argue that it's premature to predict a robust economic recovery for 2002, and that the Fed may still opt to cut its benchmark short-term rate, now 2%, to 1.75% or 1.5% when policymakers next meet, on Dec. 11.

Wednesday's Treasury bond sell-off might have been driven in part by investors selling Treasury issues to buy new bonds of AT&T. The telecom giant launched a $10-billion bond offering and attracted heavy demand, traders said.

Meanwhile, money-market mutual fund tracker said the average seven-day yield on taxable money funds fell this week to 1.96%, from 2.16% last week and the lowest since the funds were created in the 1970s. The decline was expected after the Fed's half-point rate cut last week.

Despite paltry yields, money fund assets have continued to climb, topping $2.3 trillion last week, according to the Investment Company Institute. Wall Street bulls believe that some of that cash hoard will be shifted into stocks sooner than later, helping to sustain the market's rebound.

Among Wednesday's highlights:

* Retail stocks led the rally on optimism about spending. Federated Department Stores jumped $2.28 to $37.11, and Home Depot gained $2.23 to $46.23. Abercrombie & Fitch rose $2.34 to $23.09.

* Some key Internet stocks were sharply higher. Yahoo surged $1.24 to $15.21 and soared $2.20 to $9.49.

* Travel-related stocks rebounded. Delta Air Lines gained $1.29 to $25.97. Marriott International rose $1.50 to $36.


Market Roundup, C7-C8

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