NEW YORK -- U.S. Treasury bond yields surged yesterday to their highest level since shortly after President Clinton was elected amid concern that the Federal Reserve isn't reacting fast enough to head off inflation.
U.S. stocks plunged, tracking the decline in bond prices.
The yield on the benchmark 30-year Treasury bond rose 9 basis points yesterday, to 7.63 percent, after surging 22 basis points Friday, in the wake of a government report showing faster employment growth than expected.
Some traders had hoped for an inflation-fighting increase in short-term interest rates Friday and didn't get it. But more had expected a rate increase yesterday. High inflation cuts the value of current bonds and raises corporate borrowing costs, thus hurting stocks.
But when the Fed move did not materialize around 11:30 a.m., the typical time for such action, stock and bond prices began to fall steadily. The Dow closed at 3,629.04, off 40.46 points.
"The Fed's got a real credibility problem because no one really knows what their inflation goal is," said Roger Marshall, president of Riggs Investment Management Corp., a Washington firm with $2.5 billion in assets.
Michael Strauss, chief economist at Yamaichi International (America), added, "They're creating more damage by not" raising rates. "It tells you they're willing to take some risks" on inflation. "The market is just going to continue to weaken."
The Fed has raised the federal funds rate -- the rate banks charge each other for overnight loans -- three times this year to pre-empt inflation and to discourage speculation in stocks and bonds financed with low-cost debt. The last increase came April 18, when the Fed raised the rate to 3.75 percent from 3.5 percent.
Now, "investors want to see some sign of a Fed backbone," said James Solloway, director of research at Argus Research.
Yesterday, the benchmark 30-year bond's yield reached its highest level since Nov. 11, 1992, when it was 7.66 percent.
The two-day rise in yields of 30 basis points is the largest since Iraq invaded Kuwait in August 1990.
Since April 27, just nine trading sessions ago, the long bond has added more than half a percentage point. At this rate, the long bond could hit 8 percent by the end of the week.
"I don't think I've seen anything like this since early 1987," Frederic T. Leiner, fixed-income market strategist at Continental Bank in Chicago, said. "The magnitude astonishes me."
Stock indexes also were hammered by a decline in tobacco company shares stemming from reports that senior executives at B.A.T Industries kept secret research done in 1963 on the hazards of smoking. The executives stated that nicotine is addictive, according to documents obtained by the New York Times.
A B.A.T spokesman said the Times report was not objective and selectively used information contained in the documents.
A drop in Philip Morris Cos. stock to $50, down $2, paced the third straight decline in the Dow Jones industrial average. General Electric Co. and Caterpillar Inc. also fell.
Tobacco stocks also paced a decline in the Standard & Poor's 500 index, which lost 5.51, to 442.31.
Loews Corp fell $2.50, to $87.25; RJR Nabisco Holdings Corp., fell 50 cents, to $5.75; UST Inc. fell 87.5 cents, to $25.875; American Brands Inc. slipped $1.25, to $32.25; B.A.T Industries' American depositary receipts fell 62.5 cents, to $13.
The Nasdaq Combined Composite Index slumped 9.90, to 722.06, after losing 7.69 Friday. Intel Corp. and MCI Communications Corp. were the biggest losers.
The Dow Jones Utilities Average fell 5.47, to 183.36, the lowest level since March 1989. Utility stocks trade in tandem with bonds because of their high dividend yields and the companies' large amounts of outstanding debt, traders said.
Trading was moderate, with more than 253 million shares changing hands by the close of trading on the New York Stock Exchange. About nine stocks fell for every two that rose on the Big Board.