Yields at 15-Month Low on Signs of Economic Slowing : Markets: Index of U.S. manufacturing shows contraction in May. Stocks rally on talk of Fed rate cut.

Bond investors pushed short-term yields down dramatically Thursday, virtually demanding that the Federal Reserve Board cut its official lending rates to help the flagging economy.

Stock prices, meanwhile, edged up to new highs despite fresh concerns about a potential recession. The Dow Jones industrials added 7.61 points to a record 4,472.75.

The driving force in both markets was new data showing a marked slowdown in the economy. In a major surprise, the National Assn. of Purchasing Management said its index of U.S. manufacturing fell to 46.1% in May from 52% in April, signaling a contracting economy.

Separately, the government reported that orders to U.S. factories plunged 1.9% in April, the biggest drop in nine months, while new claims for state unemployment insurance rose to the highest level in four months.

In the bond market, where yields have been sliding all year, buyers rushed in again Thursday to lock in current returns on the assumption that yields will continue to fall with the weakening economy.

The 30-year Treasury bond yield dove to a 15-month low of 6.60% from 6.64% on Wednesday.

“As long as [economic] statistics keep coming in on the unexpectedly weak side, we think it’s feasible bond yields could get to 6.25% by the end of the summer,� said Terry Rose, who helps manage more than $2 billion at Advisers Capital Management in New York.

But the more shocking decline Thursday was in shorter-term yields. The yield on three-month T-bills plunged to 5.67% from 5.81% on Wednesday, while the one-year T-bill yield tumbled to 5.65% from 5.80%.

Those rates are most sensitive to official interest rate levels set by the Fed. And because T-bill yields have now fallen deeply below the 6% “federal funds� rate, the Fed’s benchmark overnight interest rate, the market is, in effect, saying the Fed must cut the federal funds rate sooner rather than later.

“The market is begging� for a half-point cut from the Fed, said Chris Carroll, bond trader at Nomura Securities International.

Some analysts speculated that the Fed might cut rates as early as today, when the government reports on May employment. But most economists believe the Fed will wait until July, assuming additional data confirms that the economy has slowed dramatically.

In the stock market, fear of recession caused some profit taking early Thursday, but a late buying surge drove most indexes higher.

In the broad market, advancing issues outnumbered decliners by more than 4 to 3 on the New York Stock Exchange, with 346 million shares changing hands.

Wall Street bulls are betting that worries about recession will be muted by the beneficial effects that tumbling interest rates have on stocks.

Among Thursday’s highlights:

* Many technology issues continued to bounce back. IBM rose 1 1/4 to 94 1/4, Intel jumped 2 1/2 to 114 3/4, Micron Technology gained 1 3/4 to 46 3/8 and Digital Equipment added 1 1/4 to 45 3/4.

Also, Texas Instruments surged 5 3/8 to 121 after research firm SoundView raised its 1996 earnings estimate for the company.

* Many financial services stocks also gained. Charles Schwab leaped 2 1/4 to 37 1/4, Travelers jumped 1 3/8 to 43 1/2, Merrill Lynch rose 1 3/8 to 48 3/8 and Morgan Stanley added 1 3/8 to 77 1/2.

* Drug stocks’ strength continued. Merck added 1/4 to 47 1/4 and Pfizer jumped 1 1/8 to 89 1/4.

* Mexican phone giant Telmex rose 1 7/8 to 30 after Paribas Capital Markets upgraded the stock. That helped send the recently battered Bolsa stock index in Mexico City up 66.67 points to 2,011.80.

* Some retail issues weakened on spotty May sales reports. Sears fell 3/4 to 55 3/4, Mercantile Stores was off 1 to 45 7/8 and Melville sank 1 3/4 to 38.

In foreign trading, Tokyo’s Nikkei 225-share average gained 157.78 points to close at 15,594.57. In Europe, Frankfurt’s 30-share DAX average surged 34.21 points to 2,126.38, and London’s FTSE-100 index gained 21.2 points to 3,340.6.

In currency trading, the dollar fell against the German mark, hurt by the Bundesbank’s failure to lower interest rates and by the data showing the U.S economy is slowing faster than anticipated.

In New York, the dollar closed at 1.407 marks, down from 1.415 on Wednesday, and at 84.82 Japanese yen, up from 84.50.

* CRASH LANDING?

New data suggests a more drastic economic slowdown. D2

* MARKET BEAT

How market bears are coping. D3