Stocks, Bonds Hit Hard by Fed Remarks; Dollar Gains

Bond yields soared and stock prices slumped Wednesday as Federal Reserve Board Chairman Alan Greenspan again warned that he might raise short-term interest rates soon.

Bonds got the worst of it, particularly on shorter-term issues--those that would be most affected if the Fed raised its benchmark interest rates.

The yield on two-year Treasury notes, for example, zoomed to 6.04% from 5.87% on Tuesday.

“If there was any doubt about what they were going to do before, Greenspan certainly has removed it,� said Mark Miller, who manages $500 million in fixed-income securities at Kayne Anderson Investment Management in Los Angeles.

The stock market, meanwhile, bounced back from its worst levels but still closed broadly lower. The Dow Jones industrials lost 55.03 points to 6,983.18 after falling as much as 120 points late in the day.

In case investors missed his point in December about the dangers of “irrational exuberance� in financial markets, Greenspan trotted that line out again in Senate testimony about the economy Wednesday.

The Fed is concerned that the market’s expectation of a favorable economic environment is too optimistic, he said. “It is not that we have a firm view that equity prices are necessarily excessive right now,� he said, but that the higher stock prices go, the deeper their ultimate decline if economic trends turn negative.

As usual, Greenspan did not threaten to raise interest rates simply to prick the stock market bubble. Rather, he said any credit-tightening move would be aimed at restraining economic growth in the name of keeping inflationary pressures dampened.

But his reference to the possibility of “excessive optimism� in financial markets was another hint that the Fed may feel it’s smarter to raise short-term interest rates slightly soon--even if it triggers a stock market decline--than to wait for share prices to go even higher, risking an even deeper slide when the central bank finally acts.

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In the bond market, traders dumped securities across the board. The 30-year Treasury bond yield leaped to 6.78% from 6.66% on Tuesday, though it remains well below its recent high of nearly 7%.

Greenspan’s comments coincided with the Treasury’s auction of new five-year T-notes. The average yield on those notes was 6.36%, up from Tuesday’s yield of 6.19% on older five-year notes.

“It looks like Greenspan did a better job of jawboning the market this time,� said Richard Cripps, chief market strategist at Legg Mason Wood Walker. “I think he’s got the bond market clearly thinking the Fed’s going to raise rates instead of doing nothing.�

The Fed board next meets on March 25.

In the stock market, losers swamped winners by 18 to 8 on the New York Stock Exchange and by 25 to 16 on Nasdaq, in very heavy trading.

Yet most major market indexes dropped less than 1%. The Standard & Poor’s 500 index, for example, slid 6.42 points, or 0.8%, to 805.68. The Nasdaq composite index of mostly smaller shares was off 7.14 points, or 0.5%, to 1,340.55.

Analysts said some investors simply don’t seem too concerned about a possible Fed credit-tightening move.

Indeed, Wednesday marked the second time in three months that remarks by Greenspan sent the Dow to a 120-point-plus intraday decline, only to have the market regain most of the day’s losses.

The Dow slumped as much as 144 points on Dec. 6, one day after Greenspan first raised the “irrational exuberance� issue, but it also ended that session off 55 points.

Some investors, including 82-year-old Seth Glickenhaus, a senior partner at New York-based Glickenhaus & Co., said they used the stock market’s drop after Greenspan’s remarks Wednesday as an opportunity to buy shares at bargain prices.

“The market is much bigger than Greenspan,� Glickenhaus said. “Money is going to continue to flow into stocks.�

Among Wednesday’s highlights:

* The Dow’s biggest decliner was McDonald’s, which fell 2 3/8 to 44 7/8 on word that the company will try to boost sales by cutting the price of its Big Mac to 55 cents. The Dow was also weighed down by Texaco, down 2 1/4 to 101 7/8, and Boeing, down 2 1/8 to 104 1/8.

But Philip Morris added 1/4 to 133 1/2 after announcing a 3-for-1 stock split and an $8-billion stock-buyback program.

* Financial stocks dropped as investors weighed the odds of higher interest rates. Bank of New York fell 1 1/8 to 39 1/2, Wells Fargo sank 2 1/4 to 313 3/4, Merrill Lynch slumped 2 1/8 to 95 3/4 and Dean Witter lost 1 to 40 1/8.

* Kimberly-Clark rose 3/8 to 106 5/8 after the maker of Huggies diapers and Kleenex said it plans to sell half its paper-pulp operations.

* Broadcaster Clear Channel Communications rose 2 7/8 to 47 after it agreed to buy Eller Media for $1.15 billion in cash and stock.

* Physician Corp. of America lost nearly half its value, falling 1 15/16 to 3 13/16 after it disclosed wider losses at its workers’ compensation insurance unit and said a Florida court ordered it to come up with a reorganization plan for the unit.

Also, Guess sank 2 1/2 to 10 1/2 after the clothing maker reported disappointing earnings.

* Petrolite soared 10 3/8 to 58 3/8 after Baker Hughes agreed to pay $693 million in stock for the specialty chemicals company. Baker Hughes was unchanged at 35 1/2.

In currency trading, the dollar ended higher, buoyed by prospects for higher interest rates. The dollar traded in New York just below 121 Japanese yen before rebounding to settle at 122.13 yen, up from 121.60 on Tuesday.

Overseas, Tokyo’s Nikkei stock average fell 0.4%, Frankfurt’s DAX index rose 0.1%, and London’s FTSE-100 index fell 0.4%.

Market Roundup, D6