NEW YORK -- The biggest rally in U.S. government bonds in three months ended yesterday amid renewed concern the Federal Reserve will soon raise interest rates. Stocks also fell.
Fed Chairman Alan Greenspan triggered the sell-off, which also helped push the dollar lower, by telling Congress that inflation may not be under control.
The hint that the central bank might raise rates for a fifth time this year surprised investors who had been buying bonds in the past week. After Mr. Greenspan spoke, "sellers came into the market," said Andrew Brenner, senior trader at Nomura Securities Co. Ltd. "The bond market had a great tone; now it has a weak one."
The yield on the benchmark 30-year bond rose to 7.56 percent from 7.46 percent Tuesday.
Yesterday's losses halted a steady rally in bonds. From July 11 through Tuesday, the 30-year Treasury bond's yield dropped 27 basis points, the biggest week-long rally since late April, when yields fell a similar amount, to 7.15 percent.
The dollar fell 0.27 pfennig, to 1.564 German marks, and dropped 0.55 Japanese yen, to 98.75.
Stocks fell on concern that higher interest rates would hurt corporate earnings and draw money out of stocks and into fixed-rate investments.
The Dow Jones industrial average fell 21.04 points, to 3,727.27, its biggest one-day drop since a 42.09-point decline June 30.
So-called "cyclical" stocks -- shares of companies sensitive to swings in the economy -- led the Dow industrials lower. Caterpillar Inc. shed $1.50, to $107.625; Aluminum Co. of America fell $1.375, to $80.625; and United Technologies Corp. dropped $1.25, to $66.375. The Morgan Stanley Cyclical Index fell 1.68, to 300.81.
Among broader market indexes, the Standard & Poor's 500 Index fell 2.26, to 451.60, as software, bank and drug issues slumped. Drug stocks fell even though Pfizer Inc., Merck & Co. Inc. and Schering-Plough posted earnings that beat analysts' estimates.
Pfizer cautioned that profit for the year would be at the low end of expectations and said royalty payments to Bayer A. G. for a heart drug would increase by $36 million this year. Pfizer fell $2, to $60.125; Merck & Co. Inc. slipped 25 cents, to $29.375; Eli Lilly & Co. lost 25 cents, to $48.625; and Schering-Plough fell 37.5 cents, to $61.625.
The Nasdaq Composite Index, which is heavily laden with technology companies, slipped 6.55, to 712.77, its lowest level since July 12. Shares of Microsoft Corp., Oracle Systems Corp. and Sybase Inc. sagged the most. Microsoft will meet with analysts today to provide an outlook for the coming year.
Declining stocks outpaced advancers by about 2 to 1 on the New York Stock Exchange, where about 268.04 million shares traded hands. The three-month daily average volume is 268.33 million shares.
In his semiannual Humphrey-Hawkins report on monetary policy before the Senate Banking Committee, Mr. Greenspan hinted that the Fed may have to raise interest rates for the fifth time this year. The rate on overnight bank loans has risen to 4.25 percent from 3 percent.