Bond Yields Fall on Drop in Auto Sales : Market Overview

* Interest rates dropped sharply on news of an unexpected fall in auto sales, which suggested a still-weak economy. The yield on the Treasury’s bellwether 30-year bond tumbled to 7.94% from 8.03% Monday.

* Stocks closed lower in uncertain trading, also dogged by the auto sales report. The Dow Jones industrial average fell 11.18 points to 3,260.96.

Credit

“It was a great day for bonds,� said Ward McCarthy, analyst at Stone & McCarthy Research Associates in Princeton, N.J.

The price of the Treasury’s 30-year bond rocketed 1 1/32 point, or $10.31 per $1,000 face amount as buyers surged into the market. As demand for bonds increases, their prices rise and their yields fall.

The catalyst for the buying frenzy was news that sales of North American-made cars and trucks fell 3.3% in the latest 10-day period versus a year earlier.

At the same time, McCarthy said, the bond market was rife with rumors that retail sales in March have been weaker than in January or February.

Both reports indicated that the nation’s economic recovery might not be as strong as other data has suggested recently. Thus, many investors concluded Tuesday that the Federal Reserve might be forced to lower interest rates again to help the economy.

Also helping bond investor sentiment was strong demand at the Treasury’s auction of $14.78 billion in two-year notes, a record amount. The average yield on the notes was 5.85%, up from 5.40% at the last auction on Feb. 25.

McCarthy said the bond market faces a bigger test with the planned auction today of five-year T-notes. Also, the government will report on durable goods orders in February, another closely watched economic indicator.

The federal funds rate, the interest on overnight loans between banks, was quoted at 3.75%, down from 4% Monday.

Stocks

Wall Street--which wants badly to see the economy recover--was clearly unnerved by the drop in car sales this month.

Losing issues outnumbered winners by about 4 to 3 on the New York Stock Exchange, as volume rose to 192.26 million shares from Monday’s depressed 157.05 million.

Auto stocks, which have been among the best performers this year, were hit. GM lost 1 1/4 to 37 3/8, Ford dropped 1 to 39 and Chrysler slid 1/2 to 17 3/8.

Still, analysts noted that most investors are clearly betting that the economy will continue to rebound, despite the car sales report. Otherwise, damage to stocks would have been a lot worse Tuesday.

Investors appear to be pinning their hopes on first-quarter corporate earnings reports, which will begin to flow out in mid-April.

Among the market highlights:

* Worries about a weakening economy were reflected in airline issues, which followed auto stocks lower. Delta dropped 1 1/2 to 64 3/4, AMR (parent of American) fell 2 1/8 to 75 7/8 and UAL (parent of United) sank 3 1/8 to 145 1/2.

* Some recently strong industrial issues also pulled back. USX Steel slipped 7/8 to 25 1/4, Cooper Industries lost 1 3/8 to 55 and truck-maker PACCAR fell 1 3/4 to 55 3/4.

But many auto-parts stocks failed to follow the auto companies’ shares lower. Eaton gained 5/8 to 78 3/8, Echlin added 1/4 to 18 5/8 and OEA gained 1 3/8 to 30 1/4.

* Gambling stocks were the market’s bright spot on news of a huge new casino complex proposed for Chicago. Shares of the three companies involved all gained: Hilton surged 2 1/4 to 49 1/2, Caesars World rose 7/8 to 39 1/8 and Circus Circus rocketed 3 1/8 to 44 1/8.

Also gaining were firms that make slot machines and other games: International Game Technology soared 3 7/8 to 61 3/8, WMS Industries rose 2 to 22 1/8 and Video Lottery Technology surged 1 5/8 to 36 7/8.

* Beleaguered American Express rose 3/4 to 23. The Supreme Court of Dubai overturned a $75-million judgment against the Dubai operation of Amex’s brokerage unit Shearson Lehman.

* Software firm Borland International plunged 7 1/4 to 63. Investors were reacting to competitor Microsoft’s purchase of Fox Software, which will give Microsoft an instant stake in the PC database market long dominated by Borland. Microsoft slipped 1 to 127 1/2.

* K mart added 3/8 to 53 7/8 after trading as high as 55, an all-time high. The retailer announced a 2-for-1 stock split and a 4.5% dividend hike.

Overseas, Tokyo’s Nikkei stock index again plunged below 20,000, as sellers swamped the market. The Nikkei closed off 348.03 points, or 1.7%, at 19,891.57.

In London, share prices recouped Monday’s losses as sentiment improved after a public opinion poll showed the ruling Conservatives ahead of the Labour opposition. The FTSE-100 index rose 17.7 points to 2,458.7.

In Frankfurt, the DAX average slipped 4.34 points to 1,713.11.

Currency

The dollar was mostly lower in light trading as the market reacted mildly to the car-sales report. Signs of a weaker U.S. economy would be expected to push the dollar down.

In New York, the dollar closed at 1.664 German marks, down from 1.667 Monday. Against the Japanese yen, though, the dollar finished unchanged at 133.45.

Commodities

Gold futures moved higher Tuesday on New York’s Commodity Exchange and held firm with the support of a softer dollar.

The advance was enough to help silver and platinum overcome a fundamental weakness and close roughly unchanged.

On the Comex, March gold futures advanced $1.40 to $339.60 an ounce; March silver was 0.1 cent higher at $4.09.

Elsewhere, heating oil futures were mostly lower, but other energy prices advanced at the New York Mercantile Exchange. Light sweet crude oil for delivery in May was 9 cents higher at $19.22 a barrel.