FINANCIAL MARKETS : Bond Weakness Reins In Stocks in Late Trading

Stocks ended little changed Monday as optimism generated by Friday’s rally gave way once again to rising interest rates.

Still, among the shares performing best were those of the companies whose fortunes are closely tied to the economy, such as autos, heavy construction and mining.

The Dow Jones industrial average fell 3.70 points to 3,741.92, while in the broader market, advancing issues outnumbered declines by about 10 to 9 on the New York Stock Exchange.

Big Board volume fell to 258.49 million shares from 284.76 million on Friday.

In the absence of any significant news to guide investors, stocks drifted higher for much of the day, only to be pulled down late in the session by weakness in bonds.

Short-term Treasury bills plunged in value, and longer-term securities posted narrower losses in a lopsided selloff that markedly narrowed the difference between short- and long-term interest rates.

By the end of the day, the yield on the one-year Treasury bill shot up to 7.10%--nearly as much as the 7.81% yield on notes that don’t mature for 10 years.

Analysts cautioned that the trend came in thin trading, typical of the post-Thanksgiving period, with fewer transactions influencing yield movements.

The trend was driving up rates of shorter-term maturities to what was described by participants as unrealistically high levels in the last month of this year’s bond market downturn.

The Treasury’s 30-year bond closed at 7.92%, up from Friday’s 7.90%. Its price, which falls when rates rise, fell 3/16 point, or 94 cents per $1,000 in face value.

The weight of the bond market’s decline--after a spectacular rally Friday lifted the Dow more than 37 points--eventually took its toll, said Hugh Johnson, chief investment officer at First Albany Corp.

Stock investors don’t like to see interest rates rise, because that increases the cost of borrowing for companies and makes shares less attractive relative to interest-bearing investments.

Bond prices were depressed partly by a Commerce Department report indicating that sales of single-family homes rose 1.3% in October, the fourth straight advance as home buyers ignored the higher costs of financing.

That good economic news helped bolster many of the so-called cyclical stocks. Chrysler rose 1 1/8 to 49 7/8, Deere rose 1 1/2 to 64 1/2 and Alcoa rose 5/8 to 82 5/8. American Electric Power Co. added 1/4 to 33, CSX gained 1 3/4 to 70 1/8 and Bankers Trust New York was up 7/8 to 59.

But the strength in some sectors was offset by weakness elsewhere, including among retailers. Sears, Roebuck dropped 7/8 to 45 7/8 and Gap slipped 1/2 to 32 3/8.

Among other highlights:

* California Energy Co. said it reached a merger deal with Magma Power Co. giving Magma shareholders $39 a share. Magma Power rose 1 7/8 to 37 3/8; California Energy fell 7/8 to 15 5/8.

* Video games and educational software maker Electronic Arts rose 1 3/8 to 21 5/8 on rumors of a takeover or a major investment by a media powerhouse.

* Computer makers were strong, including Compaq Computer, which rose 3/4 to 40 7/8, Dell Computer gained 1 1/2 to 42 5/8 and Gateway 2000 rose 1 7/8 to 22 1/2. The computer stocks fell last week on concern about the impact from a flaw in Intel Corp.’s Pentium chip.

Meanwhile, the dollar retreated as dealers sold to lock in profits from the currency’s gains in recent weeks.

The dollar closed in New York at 1.573 German marks, down from 1.580 on Friday. The greenback also was changing hands at 100.48 Japanese yen, down from 100.61.

Elsewhere, the rise in interest rates pounded silver futures prices to their lowest level in more than a year as recession fears displaced inflation worries.

Silver fell 11.6 cents on the New York Mercantile Exchange to $4.573 an ounce, the lowest daily settlement for near-term deliveries since Nov. 30, 1993. Gold was unchanged at $375.50 an ounce.

Copper futures also fell sharply and energy futures extended their recent losses, which helped push the Commodity Research Bureau’s index of 21 commodities down 0.82 point to 227.03. Gains in hog and corn futures tempered the retreat.

Stocks ended mostly higher overseas. Tokyo’s 225-share Nikkei average rose 307.36 points to 19,305.66, while Frankfurt’s 30-share DAX average was up 32.61 points at 2,071.12. London’s Financial Times 100-share average gained 16.2 points to close at 3,033.5.

In Mexico City, the Bolsa index was down 16.06 points at 2,521.42.