Dow Sheds 156 on Bond Sell-Off as Yields Surge

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

A slight deterioration in what appeared to be a perfect economic environment Friday sent stocks sharply lower and interest rates markedly higher.

The Dow Jones industrial average dropped 156.78 points, recovering from a much steeper decline of 211 points at midday, when it briefly fell below the 8,000 mark. Analysts said the major impetus for the overall stock market drop was a big sell-off in government bonds.

Long-term Treasury bond yields rose to 6.63%, a huge increase from a week ago, when long-term interest rates dipped to 6.30%. The yield on the long-term bond had finished at 6.53% on Thursday.

Bond investors were spooked by comments this week from two Federal Reserve Bank presidents that were taken to mean the economy was gaining strength and could perhaps prompt Fed policymakers to raise interest rates soon.

That fear--coupled with a drop in the value of the dollar on foreign exchange markets and a big supply of T-bonds in Wall Street inventories following the Treasury’s quarterly refunding this week--depressed what had been an exuberant bond market.

In the broader stock market, decliners beat advancers 5 to 1 in heavy trading on the New York Stock Exchange.

The Standard & Poor’s 500-stock list fell 17.65 points to 933.54, and the NYSE composite index fell 8.83 points to 483.79.

The high-flying Nasdaq composite index, which had closed at record highs for six straight sessions through Wednesday, fell 25.66 points to 1,598.52.

Among Friday’s highlights:

* The Dow’s biggest decliners were Coca-Cola, which fell $3.88 to $62.69 after forecasting only slight improvement in third-quarter earnings; AlliedSignal, down $2.69 to $90; Procter & Gamble, down $2.75 to $143.88; and J.P. Morgan, down $2.56 to $110.69.

In fact, the only two Dow components that didn’t fall were AT&T;, up $31 to $40.44, and Disney, up 6 cents to $79.19.

* The surge in bond yields sent financial stocks lower. Citicorp fell $2.50 to $134, NationsBank lost $2.63 to $66 and BankAmerica declined $2.25 to $68.25.

* Electronic Data Systems fell $6.06 to $37.13 after it said second-quarter earnings declined 22% and warned that profit will fall short of forecasts for the rest of the year.

* Apple Computer fell $2.38 to $26.81, though shares are still up 36% since Wednesday, when co-founder Steve Jobs unveiled a $150-million infusion from Microsoft and a revamped board.

* Gold-mining companies were among the few gainers, reflecting gold’s role as a hedge against inflation. Barrick Gold rose 94 cents to $23.69, Newmont Mining was up $1.38 to $43.13 and Placer Dome rose 94 cents to $18.19.

Overseas, Tokyo’s Nikkei stock average rose 0.7%, Frankfurt’s DAX index fell 1.4% and London’s FTSE-100 fell 1.1%.

Market Roundup, D4