FINANCIAL MARKETS : Bond Yield Drops on Low Inflation News

Market Overview * Another round of good news on inflation drew more buyers into the Treasury bond market Friday. The yield on the 30-year bond sank to its fourth record low of the week.

* Stocks ended modestly higher, encouraged by lower interest rates and the weak inflation report. Mexican stocks rocketed as the North American Free Trade Agreement moved closer to reality.

* The dollar hit another postwar low against the Japanese yen for the third straight day.

Credit

Interest rates fell broadly as the Labor Department reported that consumer prices rose a mere 0.1% in July.

Most analysts said the CPI report, taken along with Thursday’s reported decline in producer prices as well as recent drops in gold and other commodity prices, remove the near-term threat of inflation and thus encourage lower interest rates.

The yield on the benchmark 30-year Treasury bond fell to a historic low of 6.35%, down from 6.43% on Thursday, after having hit record lows Monday, Tuesday and Wednesday. New 30-year T-bonds were sold Thursday at a yield of 6.33%, lower than existing bonds because buyers often pay a premium for new paper.

“By and large, it was a good week for the Treasuries,� said Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis.

Sohn noted a number of factors that created the latest downward drive in rates, including the inflation reports and the generally good reception for the Treasury’s sale of $38.5 billion in new notes and bonds this week.

He noted that the government will not sell 30-year bonds again until February, leading more investors to attempt to lock in long-term yields now.

Stocks

Stock indexes closed mostly higher, though on light volume.

The Dow industrials added 0.56 point to 3,569.65, gaining 9.22 points for the week.

In the broader market, advancing issues outnumbered declines by about 6 to 5 on the New York Stock Exchange, but volume was a mere 214.37 million shares, down from Thursday’s 278.53 million.

The drop in long-term interest rates aided the market. Low rates are good for stocks, which then look more attractive relative to fixed-income securities.

Still, stocks were slow to respond because the news on inflation wasn’t necessarily all good for stocks, said Ray Dalio, president of Bridgewater Associates.

“Slowing inflation is the result of slackening demand,� Dalio said. A slowing economy can signal bad news ahead for corporate profits.

Among the market highlights:

* Chemical stocks led the market up as some investors ignored worries about the economy’s pace. Dow Chemical gained 1 1/4 to 59 3/8, DuPont surged 1 1/2 to 48 1/8 and Monsanto leaped 2 1/2 to 62 3/8.

* Baxter International lost 1 3/4 to 24. The Department of Veterans Affairs has suspended the medical supply firm from contracts following an investigation of the company’s sales practices.

* Hauser Chemical crumbled 7 7/8 to 6 5/8. Bristol-Myers said it won’t extend a three-year contract under which Hauser provided Bristol with the drug Taxol.

* Cisco Systems headed the NASDAQ most-active list, falling 3 7/8 to 53 1/8 after the computer networker reported fiscal fourth-quarter earnings that were good but not as spectacular as many analysts had hoped.

Overseas, Tokyo’s Nikkei index ended down 20.11 points at 20,745.17. In London, the Financial Times 100-share average closed 1 point higher at 3,010.1, and Frankfurt’s DAX 30-share average ended up 1.63 points at a new three-year high of 1,906.58.

In Mexico City, the 37-share IPC index rocketed 65.63 points, or 3.7%, to 1,844.52 on news that the United States, Canada and Mexico reached agreement on NAFTA side accords.

On the NYSE, shares of Telmex, the Mexican phone giant, surged 2 to 52.

Other Markets

Traders are bracing for the plunging dollar to fall to 100 Japanese yen soon.

The dollar was quoted at 101.82 yen in New York late Friday, down from 102.91 on Thursday. The yen continues to rise thanks to the growing Japanese trade surplus, which bolsters the currency because importers of Japanese goods must buy more yen to pay for the purchases.

But in addition, traders said the yen simply has momentum, which can be hard to stop in currency markets. “It’s got an engine all its own,� said David Durst, analyst at Credit Lyonnais in New York.

The dollar also eased against the German mark, declining to 1.711 from 1.716 on Thursday.

In metals markets, gold and silver futures stabilized after plunging Thursday. Gold for current delivery closed at $369.30 an ounce, up $1.90. Silver closed at $4.61, up 6.3 cents.

Light, sweet crude oil for September delivery slipped 4 cents to $18.14 a barrel.

Market Roundup, D4