Financial Markets : Treasury Rates Slide, Pushing Stocks Higher

Long-term Treasury rates fell, pushing stocks higher Friday on news of unexpectedly tame inflation in July.

However, reflecting the prevailing view that the Federal Reserve will hike interest rates next week anyway, shorter-term maturities dipped slightly. Indeed, the inflation news only further muddled the market debate over when and by how much the central bank will next push up rates.

By day’s end, the yield on the Treasury’s 30-year bond fell to 7.50% from 7.57% on Thursday, pushing its price, which moves in the opposite direction, up 5/8 point, or $6.25 per $1,000 in face value.

Prices of short-term Treasuries, meanwhile, rose only 1/16 to 5/32 point and intermediate maturities rose 1/4 point to 15/32 point, the Telerate Inc. financial information service reported.

Still, the modest rally in long-term bonds erased nearly all the sharp price drop from Thursday, when the market tanked after a lackluster auction of new 30-year bonds and a report of higher-than-expected producer inflation.

Many traders had prepared for a sharper increase in the wake of Thursday’s report that producer prices jumped 0.5% in July. Bond market participants fear inflation because it tends to diminish the value of Treasury securities and other fixed-income investments. Inflation also increases the likelihood that the Federal Reserve will raise interest rates.

But on Friday, the Labor Department reported that inflation as measured by the Consumer Price Index, excluding the volatile food and energy sectors, rose 0.2% in July, less than expectations of a 0.3% increase.

Most analysts agreed that it would not deter the Federal Reserve from raising short-term interest rates next Tuesday at its Federal Open Market Committee meeting in a bid to head off future inflation.

But James Solloway, research director at Argus Research Corp., said it might convince the Fed to tighten just 0.25%, instead of the 0.50% that had been feared as recently as Thursday.

Back on Wall Street, where stocks rallied on the falling interest rates, the Dow Jones industrial average rose 17.81 points to 3,768.71, adding 21.69 points for the week.

In the broader market, advancing issues outnumbered decliners by about 3 to 2 on the New York Stock Exchange. Big Board volume retreated to a moderate 249.28 million shares, down from 275.70 million the day before.

The NYSE’s composite index rose 1.46 points to 254.77. The Nasdaq index of mostly smaller companies rose 3.41 points to 731.61. The Standard & Poor’s 500 list added 3.06 points to 461.94.

Among the market highlights:

* Caterpillar added 2 1/8 to 105 1/8 after the company said its worldwide sales and profits will be stronger than expected.

* Renewed takeover rumors in the food sector, notably of CPC International and Heinz, lifted food stocks. CPC added 1 3/4 to 51 7/8, and Heinz rose 1 1/8 to 37 1/8. General Mills advanced 1 11/32 to 53 31/32.

* Exxon rose 2 1/8 to 60 1/4 after a jury ordered the company to pay fishermen $286.8 million in compensatory damages for losses as a result of the 1989 Exxon Valdez oil spill. The figure was significantly lower than the $895 million that plaintiffs had asked for.

* Syntex was the most active issue on the NYSE, finishing off 1 to 21 5/8. Traders said there were rumors that Roche Holdings of Switzerland was going to cancel its bid for Syntex, but a Roche spokesman said the deal is going as expected.

* Amgen stock was higher on rumors that the biotechnology company may be the target of a takeover bid. Amgen was up 1 5/8 at 53 3/8 on 2.8 million shares traded.

Overseas stock markets were mixed despite interest rate increases in Sweden and Italy.

Frankfurt’s DAX 30-share average closed down 1.42%, or 30.6 points, at 2,124.68, while London’s Financial Times 100-share average ended up 4.1 points at 3,142.3.

In Tokyo, the Nikkei 225-share average ended at 20,663.83, off 157.53 points, and Mexico City’s Bolsa index ended 40.87 points higher at 2,637.76.

Meanwhile, the dollar fell modestly against other key currencies as most U.S. dealers shrugged off an early plunge in European trading and focused instead on the U.S. bond and stock markets.

In New York, the U.S. currency finished at 1.552 German marks and 100.15 Japanese yen, down from 1.561 marks and 100.23 yen, respectively, on Thursday.

Market Roundup, D3