Treasury Sale Trips Up Stocks

PETER A. MCKAY ROB CURRAN

A weak Treasury auction sent yields to the highest levels in more than seven months and unnerved stock investors who fear that higher interest rates could choke off an incipient economic recovery.

The Dow Jones Industrial Average declined 24.04 points, or 0.3%, to 8739.02. The benchmark is now down 0.4% for the year to date.

Other benchmarks also finished with mild losses. The S&P 500 declined 3.28, or 0.4%, to 939.15, led by drops of 1.5% each in its financial and its consumer-discretionary sectors. The Nasdaq Composite Index sank 7.05 points, or 0.4%, to 1853.08.

Stock markets were rattled after yields jumped following a weak auction of 10-year Treasury notes. The yield on the 10-year note jumped as high as 3.996%, highest level since mid-October.

"Higher interest rates are not good for anyone; it's going to kill the refinancing boom and slow the housing market," said Joseph Saluzzi, a co-founder of brokerage Themis Trading.

The fears raised by the Treasury auction were punctuated by the Federal Reserve's beige book report on regional economic activity, which found that conditions remained weak and even deteriorated in many areas of the country as recently as last month.

Despite that report, oil prices continued to push higher. Oil futures settled up $1.32 at $71.33 a barrel in New York following the release of government data showing a bigger drawdown in U.S. stockpiles of crude last week than analysts expected.

Keith Lanigan, managing editor of the Web site midnighttrader.com, which tracks after-hours market activity, said the late round of buying that trimmed the losses in major averages didn't carry into late trading. He said it appeared that proprietary desks on Wall Street were executing automated "buy" orders late in the day as short-term bets, not deeply held optimism that the market's fundamentals are improving.

If anything, just the opposite is the case, with the rise of oil above $70 especially troublesome, Mr. Lanigan said.

Investors digested big picture news following the release of the government's economic survey as well as a bond auction. Concerns about inflation drove markets lower. Dave Kansas reports after the bell.

"You just can't keep driving the market higher in that sort of environment," which is likely to include a cutback in consumer activity as drivers reduce other purchases to fill up at the pump, said Mr. Lanigan. "I think we're seeing that rationale come into the market a bit lately. We have these late pushes, but they just can't sustain them like they did a few months back."

The tug of war between bulls, who believe the worst of the recession and financial crisis is over, and bears, who believe the recent rally was yet another false dawn, continued.

Options trader Richard Sparks, of Schaeffer's Investment Research in Cincinnati, said he believes the stock market's recent inflation jitters are somewhat premature.

"I wouldn't say the market has it wrong, but it's probably telling us inflation is a threat six to nine months out," said Mr. Sparks. "For now, all the data are telling us it's not much of a danger at all," given the lingering weakness in employment and consumer spending.

But Barry James, president of James Investment Research, an analysis and portfolio-management firm in Alpha, Ohio, said his firm has been trimming its stock portfolio to book profits and brace for more rate-related developments like Wednesday's Treasury auction.

"With so much bond issuance coming, I think we're still in the early stages," of a years-long cycle of higher rates and inflation spurred by the government's efforts to stimulate the U.S. economy, said Mr. James. His firm is holding onto investments in gold, debt issued by foreign governments, and raw-materials stocks, though it has been selling in other U.S. market sectors.

LATICONOMICS

Wednesday, June 10, 2009