T-Bond Rate Surges to 7.11%

Investors bailed out of long-term bonds for a second straight session on Friday, as the government’s report of smaller-than-expected job creation in April failed to assuage fears of faster economic growth and higher inflation ahead.

But the stock market held on to modest gains for much of the session, until blue-chip issues succumbed to selling in the final two hours, chipping 20.24 points off the Dow industrials, to 5,478.03. Smaller stocks, however, still closed slightly higher, after diving on Thursday.

In bond trading, the yield on the bellwether 30-year Treasury bond--which affects other long-term rates, such as on mortgages--zoomed to 7.11% from 7.05% on Thursday and now is the highest since exactly one year ago.

The April employment report, which showed that a mere 2,000 net new jobs were created in the month, initially was greeted positively by the bond market, which had been panicked Thursday with the government’s estimate that the economy grew at a surprisingly strong 2.8% annualized rate in the first quarter.

But as trading wore on Friday, minvestors apparently attached more significance to the drop in the unemployment rate to a 14-month low, and to a greater-than-expected rise in average hourly earnings in April--a potential signal of higher wage inflation, which could generate higher inflation throughout the economy.

Some investors fear that a continued pickup in the economy and/or signs of rising inflation will compel the Federal Reserve Board to begin tightening credit again by raising short-term interest rates to restrain growth. The Fed has been cutting rates since last July.

“I think the Fed is going to need to tighten again, and before the [November] election,” warned William Dudley, economist at brokerage Goldman, Sachs & Co. in New York.

But many analysts argue that the economic data this year isn’t pointing to anything more than modest growth and that the Fed will be content to leave rates alone--regardless of the bond market’s mood swings.

“I don’t think the [Fed] is shocked or spooked by these numbers,” said David Blitzer, economist at Standard & Poor’s Corp.

Indeed, shorter-term yields, such as on 6-month T-bills, have risen only modestly this year even though longer-term yields have jumped more than 1 percentage point. The subdued nature of short-term yields suggests that many investors don’t expect the Fed to raise rates much, if at all, in the near future.

Even so, the fresh dumping of long-term bonds Thursday and Friday was reminiscent of 1994, when the economy’s pace remained strong and investors continually sold bonds, fearing higher inflation that never materialized. If upcoming economic data confirm faster growth, bonds’ sell-off could feed on itself, driving yields even higher, some analysts say.

For stocks, Friday’s mixed session showed that many investors are trying to look past higher interest rates to what could be stronger corporate earnings in a resilient economy.

Small-company stocks, which led the market in April, bounced up Friday after falling Thursday--which had been the first losing day in 10 sessions. The Nasdaq composite index added 6.27 points to 1,184.60 on Friday after diving 21.33 points on Thursday. Rising stocks beat losers by 21 to 17 on Nasdaq on Friday.

But losers had a 12-to-11 edge on the Big Board. The Dow’s 20.24-point loss added to Thursday’s 76.95-point slide, for a net loss of 89.96 points for the week.

Analysts warn that although stocks have overlooked bonds’ turmoil so far this year, yields are reaching levels that could make it difficult for stocks to keep rising.

Among Friday’s highlights:

* Some industrial issues that could gain from a stronger economy closed up. Alcoa rose 1 1/4 to 62 3/4, Union Carbide jumped 2 7/8 to 48 and Nucor gained 7/8 to 57 7/8.

* Many tech stocks also rose. Intel was up 11/16 to 68 11/16, Motorola jumped 2 to 62 5/8, Zenith Electronics shot up 2 3/4 to 15 3/4 and Broderbund leaped 3 1/4 to 48 1/4.

* In bizarre activity, Comparator Systems, an Orange County firm that makes fingerprint identification systems, soared 22 cents to 28 cents a share on volume of more than 121 million shares--a Nasdaq record. The tiny firm, which has 564 million shares outstanding, said it plans to unveil a new product.

Market Roundup, D4

* CONFUSING REPORT

U.S. created few new jobs, but jobless rate falls. A1

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Yields’ Split Decision

Longer-term bond yields have climbed more than 1 percentage point since Feb. 1, as investors have reacted to stronger-than-expected economic growth. But short-term yields still don’t appear to be signaling a dramatic credit tightening by the Federal Reserve Board. Yields on Treasury securities of three maturities:

Friday

6-month T-bill: 5.34%

2-year T-note: 6.20%

30-year T-bond: 7.11%

Source: Reuters