New York Market: Shares hold firm as bond yields jump

BOND yields jumped last week - something that is usually disastrous for stocks. Yet US stocks were little changed from the previous week, bolstered by a strong economy with little inflation.

Financial companies such as Chase Manhattan and American Express, usually among the first to fall when bonds tumble, actually managed to eke out gains.

Over the past two weeks, all growth-related economic indicators, including housing starts and consumer confidence, matched or exceeded analysts' expectations. Yet inflation, as measured by the gross domestic product price deflator, rose only 1 per cent, the smallest increase in 50 years. "Stocks are unfazed by (rising) bond yields because every piece of inflation news you see is good," said Gary Campbell, for Commerce Bank.

For the week, the Dow Jones Industrial Average declined 0.4 per cent, the Standard & Poor's 500 fell 0.1 per cent, and the Nasdaq rose 0.2 per cent.

Investors are still concerned that the Federal Reserve eventually may raise interest rates to cool the economy. Fed Chairman Alan Greenspan told Congress last week that while no signs of inflation were apparent, the central bank would be quick to raise interest rates if necessary. Last week alone, the yield on the 30-year Treasury bond rose to 5.58 per cent from 5.39 per cent. It was the worst month for bonds since 1980.

Investors will be watching this Friday's report on employment for signs that the economy is overheating, particularly the part on wage costs. Economists estimate that hourly earnings rose 0.3 per cent in February, down from a 0.5 per cent increase a month earlier. The jobless rate is expected to stay at 4.3 per cent.

Even if the Fed does raise interest rates to cool the economy, some investors don't think that will be bad for stocks. "There's such a tailwind on this economy that growing profits will outweigh the threat of rising borrowing costs," said Donald Coxe, at Harris Investment Management.

"What they're doing is making minor, on-course adjustments to keep the US economy in good shape," said Howard Kornblue, manager at Pilgrim America Capital. "It's still a positive environment for equities."

Financial companies proved the point this week, rising even as bond yields climbed. They could extend gains as they benefit from the disparity between high yields and low short-term rates.