Bond Yields Drop on Greenspan Remarks

Long-term Treasury bond yields sank to near 14-month lows Tuesday after Federal Reserve Chairman Alan Greenspan suggested that there may be no reason to expect a rebound in yields soon.

But the stock market, which rallied with bonds early in the day on Greenspan’s remarks, gave up most of its gains to close mixed.

In commodity trading, oil prices fell for a second day.

The bond market saw another rush of buying after the Fed chief, speaking to a financial conference in Beijing via satellite, said that although the central bank was puzzled by the steep decline in long-term bond yields over the last year -- as the Fed has raised short-term rates -- there may be no sudden change in the trend in bonds.

Asked whether there would be any near-term shift in the forces driving interest rates, Greenspan said: “I would think not.�

The yield on the 10-year Treasury note, a benchmark for other long-term interest rates, slid to 3.90% from 3.95% on Monday. The yield hit a 14-month low of 3.89% one week ago today.

The yield on the government’s longest-term bond, an issue maturing in 2031, fell from 4.24% on Monday to 4.19%, the lowest since mid-2003.

Greenspan was suggesting “he’s not expecting to see a change in yields anytime soon,� and that’s great for bond market bulls, said Andrew Roberts, Merrill Lynch & Co.’s chief European fixed-income strategist in London.

Falling yields mean older bonds issued at higher fixed rates rise in value.

Long-term bond yields also fell overseas. The yield on the German government’s 10-year note slid to a generational low of 3.16% from 3.22% on Monday.

Some analysts also said it was positive that Greenspan seemed to have given up trying to jawbone long rates higher. Earlier this year, some Fed policymakers had suggested that investors were making a mistake to push bond yields lower as the central bank tightened credit.

“Greenspan did not disagree with the level of rates and that in itself was enough to support more buying� in the bond market, said Glen Capelo, a Treasury trader at RBS Greenwich Capital in Greenwich, Conn.

But stock prices, up sharply for much of the session, slid in the final two hours. Some traders said the pullback was triggered by worries that, even if long-term interest rates stay level or fall further, the Fed might continue to raise its benchmark short-term rate, now 3%.

The Dow Jones industrial average and other indexes declined after Atlanta Fed President Jack Guynn said labor costs were rising in some sectors, suggesting the central bank was still concerned about inflation.

“Guynn’s comments didn’t help,� said Steve Sachs, head of trading at Rydex Investments, which oversees $14 billion in Rockville, Md. “We keep hearing mixed messages from the Fed.�

The Dow, up as much as 111 points, ended with a slight gain, up 16.04 points, or 0.2%, to 10,483.07.

Other indexes were mixed. The broader Standard & Poor’s 500 dipped 0.25 point to 1,197.26; the Russell 2,000 index of smaller stocks edged up 0.84 point, or 0.1%, to 623.78.

The technology-heavy Nasdaq composite, which has led the market’s rally since late April, lost 8.60 points, or 0.4%, to 2,067.16.

Winners outnumbered losers by 5 to 4 on the New York Stock Exchange, but losers had the edge on Nasdaq.

Oil prices declined in advance of the government’s weekly inventory data, due today. Near-term crude futures fell 73 cents to $53.76 a barrel in New York.

Investors will be tuning in to Greenspan on Thursday, when he testifies before Congress on the state of the U.S. economy.

Among Tuesday’s market highlights:

* Texas Instruments lost 47 cents to $27.28, leading a decline in chip stocks. But after the market closed the world’s No. 1 maker of semiconductors that run mobile phones said second-quarter sales may reach its highest forecast. The stock rose to $27.88 in after-hours activity.

* Utilities and real estate investment trusts rose as falling bond yields made high-dividend stocks more appealing. The Dow utility stock index gained 1.23 points, or 0.3%, to 370.13. It is up 10.5% year to date. A Bloomberg News index of 148 REIT stocks rose 0.8% to a record high. It is up 2.1% this year.

* Monsanto, the No. 1 developer of genetically modified crops, rallied $2.83 to $61.63 after the company said earnings beat expectations in its most recent fiscal quarter.