Bond Rates Rise on Deficit Fears; Stocks Inch Up : Market Overview

* Short- and long-term interest rates continued to surge as concerns over higher federal deficits under a Clinton Administration weighed on the market. U.S. investors failed to be heartened by a cut in German interest rates.

* The stock market closed mostly higher, as many investors took the view that a Clinton Administration will assure a bona fide economic recovery in 1993.

Credit

Investors and traders bailed out of bonds for a fifth straight session, as Bill Clinton’s election as President seemed all but assured. Bond owners are sure that a Democratic Administration will boost federal spending and thus push interest rates up in the long run.

The yield on 30-year Treasury bonds jumped to 7.64% from 7.57% Monday as the bond’s price tumbled $8.13 per $1,000. The new yield is the highest since late July.

The heaviest selling was in shorter-term securities. The yield on 10-year Treasury notes zoomed to 6.89% from 6.69% Monday. The discount rate on 1-year T-bills jumped to 3.44% from 3.28%.

Traders said yields on very short-term securities were rising in part because investors had pushed those rates too low previously, betting on another rate cut by the Federal Reserve.

Longer-term yields, however, are suffering from “a case of Clintonitis,� said Kevin Flanagan, economist at Dean Witter Reynolds: Investors figure Clinton will do whatever it takes to get the economy moving again, even if that means higher federal spending that could spark inflation.

Fear of inflation causes investors to demand higher yields on bonds to compensate. Also, higher federal spending would mean greater Treasury borrowing ahead, in effect devaluing existing bonds.

The Los Angeles Times on Friday quoted Clinton aides as saying the candidate was considering a spending increase in his first year to stimulate the economy. Clinton has since stressed his commitment to reducing the deficit, but bond investors remain unconvinced.

In what is perhaps an ominous sign, yields have been rising particularly fast on five-year to 10-year bonds. Securities of those terms had been wildly popular all year as investors sought to escape low money market yields. Now, traders say it appears that investors are as eager to rush out of those so-called intermediate-term bonds as they were to rush in just a month ago.

Meanwhile, the bond market all but ignored the good news Tuesday: Germany’s central bank, under pressure to stop the nation from sliding into economic stagnation, triggered a slight fall in money market interest rates.

A key overnight bank rate eased to 8.9% from 8.95% after the Bundesbank informed banks that it would tolerate a drop in the rate at which it provides funds to the banking system. Analysts say the move is important because lower European interest rates could help keep a ceiling on U.S. rates in 1993.

Stocks

The Dow Jones industrials slipped 2.43 points to 3,186.02, but broader indexes finished higher in heavy trading, ignoring rising interest rates for a second day.

On the New York Stock Exchange, rising issues topped losers by about 5 to 4. Volume jumped to 258.21 million shares against Monday’s 222.15 million.

Analysts said the market appears to be heartened by talk of a faster economic recovery under a Clinton Administration. Faster growth would mean higher corporate profits.

Traders noted that, historically as recessions end, the stock market loses its obsession with interest rates and focuses on profits.

Among Tuesday’s highlights:

* Industrial issues were the day’s stars, on new hopes for the economy. Kimberly-Clark gained 1 1/4 to 53 5/8, Trinova rose 1 1/8 to 22 1/4, machinery maker FMC Corp. jumped 1 3/4 to 45 3/8, and Caterpillar advanced 1 to 53 3/8. Also, Chrysler rose 5/8 to 25 1/2 after posting a strong third-quarter profit.

* The technology stock rally also continued. Many tech companies would benefit from a stronger economy. Intel rose 7/8 to 66 3/4, AST Research jumped 1 1/8 to 19, and Motorola leaped 1 7/8 to 96 1/4.

Among biotech firms, Amgen rose 2 3/8 to 66 1/2. After the market closed it reported better than expected quarterly earnings.

* On the downside, Arkla slumped 1 7/8 to 7 3/4, or 18%. Federal regulators said the natural gas firm is liable in a lawsuit in connection with the failure of an S&L; formerly owned by its Entex unit.

* Del Webb tumbled 3 5/8 to 17 1/4 after the retirement-community builder said it expects home orders at its new Palm Springs community to be lower in the current quarter than in the last quarter.

Overseas, the cut in German interest rates helped Frankfurt stocks. The DAX index shot up 32.48 points or 2.2% to 1,511.55. Shares also rose in London, as the Financial Times 100 index gained 54.8 points or 2.1% to 2,617.0.

In Tokyo, stocks rose in dull trading, with the Nikkei average adding 83.85 points to 16,987.66.

In Mexico City, the Bolsa index shot up 45.53 points, or 3%, to 1,555.22 after the government ruled out any sharp one-time devaluation of the peso. Instead, it will allow a faster daily depreciation versus the dollar.

Other Markets

The dollar jumped against most currencies, bolstered by rising U.S. interest rates and expectations of a stronger economy in 1993 under a Clinton Administration.

In New York, the dollar rose to 122.50 Japanese yen from 120.45 Monday. It also rose to 1.516 German marks from 1.499.

Meanwhile, coffee futures prices surged on New York’s Coffee, Sugar & Cocoa Exchange as Brazilian producers continue to withhold their crop from the market. Coffee for December added 2.70 cents to 64.85 cents a pound.

On New York’s Comex, October gold rose $1.10 to $343.80 an ounce; silver added 6 cents to $3.78.

Light, sweet crude oil fell 28 cents to $21.86 a barrel on the New York Mercantile Exchange.