Dow Sheds 156 on Bond Sell-Off as Yields Surge

“Nirvana” no longer appears to be the best word to describe financial market conditions.

Another sell-off in bonds on Friday sent yields soaring and finally got the best of the see-no-evil stock market, where prices tumbled.

The dollar also dove, as investors dumped U.S. stocks and bonds.

The Dow Jones industrial average sank 156.78 points, or 1.9%, to 8,031.22, although it recovered from a much steeper decline of 211 points at midday. (Main story, A1.)

In the broad market losers swamped winners by 25 to 5 on the New York Stock Exchange and by 27 to 15 on Nasdaq. The Nasdaq composite index dropped 25.66 points, or 1.6%, to 1,598.52.

Bond yields have been rising for the last week, reflecting worries over strong July employment data a week ago and hints from some Federal Reserve Board officials that the Fed is worried about a pickup in economic activity.

On Friday, absent any major news, buyers simply seemed to go on strike in the bond market. Result: Yields surged as bond dealers tried to find a level at which investors would take bonds.

By the close, the yield on the 30-year Treasury bond was at 6.63%, up from 6.53% Thursday and the highest since July 3.

The bond market’s problems were compounded by two factors: First, the Treasury sold $38 billion in new bonds this week, leaving ample supply in the market; and second, it’s mid-August, and many investors are vacationing.

“We haven’t run into any core buyers--or not a lot of them,” said Mark Sauvigne, a bond trader at Chase Securities. “And we have foreigners that just aren’t buying.”

Until Friday, stocks had largely ignored rising bond yields. But breaking above the 6.5% level on the T-bond on Thursday seemed to unnerve some stock investors--especially with share prices near record highs.

Also hurting: Coca-Cola said its third-quarter earnings would be just slightly ahead of the 39 cents a share earned a year ago. Coke didn’t explain, but many analysts believe it has been hurt by the dollar’s strength, which depresses foreign-derived earnings.

Analysts had expected earnings of 44 cents for Coke this quarter.

Coke’s announcement pushed its shares down $3.88, or 5.8%, to $62.69, and helped depress other favorite blue chips. Exxon lost $2.13 to $105.25, Caterpillar fell $2.31 to $58.38 and Johnson & Johnson dropped $1.38 to $59.38.

Also, Electronic Data Systems plunged $6.06 to $37.13 after it warned that profit will fall short of forecasts for the rest of the year.

Meanwhile, the dollar tanked with stocks and bonds, plunging to 114.76 Japanese yen, down from 118.45 Thursday, and to 1.846 German marks from 1.869.

Could this be the start of a major pullback in U.S. markets? Many analysts simply say that a “correction” in stocks is long overdue.

“The market can’t go up 1% a day for the rest of our lives,” said Jeffrey Applegate, chief market strategist at Lehman Bros.

Market Roundup, D4