Stocks Dip on Weak Bond Auction, Interest Rate Worries

By Renae Merle
Washington Post Staff Writer
Thursday, June 11, 2009

Wall Street took a break from its three-month rally yesterday, closing down slightly after a relatively weak auction of government bonds sparked concerns about rising interest rates.

After briefly bouncing into positive territory for the year, the Dow Jones industrial average lost its footing and closed down for the second day in a row. The index of 30 blue-chip stocks fell 0.3 percent, or 24.04 points, to 8739.02. The broader Standard & Poor's 500-stock index was down 0.3 percent, or 3.28 points, closing at 939.15, while the tech-heavy Nasdaq composite index fell 0.4 percent, or 7.05 points, to 1853.08.

The focus yesterday was on an auction of $19 billion in 10-year securities, part of $65 billion in government bonds being sold this week. There were enough bidders, but buyers asked for higher interest rates, or yields, in return for their investment, analysts said. This came along with reports that Russia's central bank planned to cut back its purchases of U.S. bonds and invest in International Monetary Fund bonds instead.

Investors have become concerned that the United States is taking on too much debt, potentially driving up interest rates and stymieing the economic recovery, analysts said. "Printing money is something eventually you have to pay the price for, and right now you are seeing it in the bond market, and it's going to be paid with higher interest rates," said Matthew D. McCormick, a banking analyst at Bahl & Gaynor Investment Counsel, an investment management firm.

That concern has driven down the price of long-term government bonds, pushing their yields up. A higher yield means there is less demand for the bond. The yield on 10-year bonds, a market benchmark, climbed to 3.95 percent yesterday, its highest level this year, and compared with 3.86 percent Tuesday. The interest rate had fallen to 2 percent late last year when investors saw bonds as a safe haven from market turbulence.


Meanwhile, crude oil prices climbed 2 percent to $71.33 a barrel on the New York Mercantile Exchange. Oil prices have more than doubled from their low in March, and some analysts predict oil could reach $75 a barrel within months. That helped rally energy stocks, but it has also raised concerns that rising fuel prices could further hamper already weak consumer spending.