FINANCIAL MARKETS : Stocks, Bonds Dive, Then Recover in Wild Session

In a nerve-racking session on Wednesday, stock prices slumped as bond yields surged, but both markets recovered most of their losses by the close.

In Mexico City, stocks closed sharply lower for a second day as the peso weakened.

U.S. markets’ wild swings--in heavy trading--were attributed in part to end-of-quarter “window dressing,� as money managers weed out some securities while flocking to others, all for the benefit of quarterly portfolio statements that will go to clients.

The Dow Jones industrial average closed with a loss of just 3.25 points at 4,762.35 after falling more than 50 points early in the day.

Stocks’ early slide was blamed on a jump in bond yields, after the government reported a surprisingly large increase in durable goods orders in August.

That report raised doubts that the Federal Reserve Board will feel compelled to lower interest rates any further if Fed governors assume that the economy is coming out of its funk.

As a result, bond yields surged in early trading. The 30-year Treasury bond yield jumped from 6.57% at Tuesday’s close to 6.64% at midday Wednesday.

But bonds began to recover after reports of better-than-expected demand at the Treasury’s auction of $11.5 billion of new five-year notes. The average yield on the notes was 6.14%, down from 6.37% at the last auction Aug. 23.

Fresh buying of bonds across the board drove the 30-year T-bond yield back to 6.57% by the close.

For the stock market, the bond market’s rebound couldn’t have happened soon enough. Heavy profit taking, especially in smaller stocks on the Nasdaq market, was ravaging Wall Street at midday.

The Nasdaq composite index was off nearly 29 points at its intraday low--a 2.8% decline--but recovered to finish off 11.51 points, or 1.1%, at 1,026.54.

“As soon as bonds started turning off their lows, stocks started improving,� said Trude Latimer, an independent market strategist.

Some analysts were encouraged that the market repeated a familiar pattern of recent days, with deep morning selloffs followed by afternoon rebounds. But others warn that such volatility, even if tied to end-of-quarter portfolio shifts, could be a sign that the bulls are losing the upper hand.

Indeed, the market still finished broadly lower Wednesday, though individual stocks’ losses were generally minor. Losers outnumbered winners by 14 to 8 on the New York Stock Exchange and by 27 to 12 on Nasdaq.

Larry Wachtel, market analyst at Prudential Securities, noted that some investors are selling to take profits in stocks that have performed well this year--especially technology issues--but may not feel rushed to redeploy those profits in other stocks.

Investors who are exiting tech issues may believe that “it’s hard to find alternatives� in the market now, as the list of companies warning about weak third-quarter earnings lengthens, Wachtel notes.

On Wednesday, companies including McClatchy Newspapers, Birmingham Steel and health maintenance organization FPA Medical added to other firms’ recent announcements that this quarter’s results won’t meet expectations.

Among Wednesday’s highlights:

* Technology stocks bore the brunt of the selling. Losers included Apple, down 1 1/8 to 36 1/4 after falling as low as 34 3/4, and Intel, which eased 7/16 to 59 5/16 after trading as low as 57 1/4.

Other issues sinking included BMC Software, off 2 1/8 to 47 1/8; Cisco Systems, down 1 5/8 to 68, and America Online, which dropped 2 3/4 to 67 3/4.

On the plus side, Computer Sciences rose 1 3/8 to 63 5/8, IBM added 1 1/2 to 94 3/8 and Digital Equipment gained 1 7/8 to 42 5/8.

* Industrial issues were mixed. Caterpillar lost 2 to 56 1/8 and DuPont fell 1 to 66 7/8, but Alcoa rose 1 1/8 to 52 1/8 and Dow Chemical was up 1/2 to 74 3/4.

Hayes Wheel soared 5 5/8 to 26 1/2 after the wheel maker said it received an unsolicited offer from Varity to purchase the rest of its stock for $25 a share.

* Strength in utility and financial stocks helped limit the market’s losses. The Dow utility index gained 1.19 points to a 1995 high of 212.50 as investors sought out shares that might hold up better in a broad market decline.

Bank stocks were also resilient. NationsBank rose 7/8 to 68, Chemical Banking gained 1 to 60, Citicorp jumped 2 to 70 7/8 and Wells Fargo shot up 4 1/4 to 186 3/8.

* Food stocks benefiting from investors’ search for refuge included Campbell Soup, up 1 3/8 to 51 1/8; General Mills, up 1 1/2 to 56 3/4, and Unilever, up 1 3/4 to 130.

Also, Morrison Restaurants jumped 2 1/2 to 20 1/4. The company approved a plan to spin off its family dining and health care businesses to shareholders.

In Mexico, stocks fell to 12-week lows amid concern that a weakening peso could force interest rates higher. The Bolsa index fell 68.95 points, or 2.9%, to 2,343.06 after losing as much as 100 points during trading. It was one of the worst days for the market since the financial mayhem that followed last year’s peso devaluation.

Mexico’s peso, already reeling, was hammered by the stock market selloff, slipping nearly 5 centavos to 6.46 per dollar. Analysts said foreigners were selling stocks, changing their money back into dollars and getting out of Mexico until things improve.

In other foreign markets, London’s FTSE-100 closed 38.3 points lower at 3,485.0. But Tokyo’s Nikkei 225-share index rose 340.45 points to 18,262.43.

In Germany, the DAX index fell 42.41 points to 2,185.44.

The U.S. dollar, meanwhile, was undermined by the selling in U.S. stocks and bonds and by gains in the German mark against the Italian lira and British pound.

The dollar closed at 100.46 Japanese yen in New York, down from 101.08 on Tuesday. It also fell to 1.4243 German marks from 1.4373.