FINANCIAL MARKETS : Dow Climbs 6.75; Bond Yields Soar : Market Overview

Blue chip stocks ended with modest gains after a retreat in bond prices and IBM stock carved away most of the market’s large early gain.

The Treasury’s key 30-year bond yield soared to 7.25% from Monday’s seven-year low of 7.19% as investors retreated on reports of an improving economy and weak demand at an auction of short-term government notes.

Stocks

Computer-triggered buy programs kicked in after IBM announced that it was slashing its dividend and seeking a new chief executive. But by the end of the session, sell programs were dumping stocks and traders were taking profits.

In the bond market, the Treasury’s 30-bond came under pressure following a poor two-year note auction by the government.

The Dow Jones industrial average, which had been up nearly 40 points, ended the session at 3,298.95, up 6.75. Advancing issues outnumbered declining ones by about 5 to 4 on heavy New York Stock Exchange volume of 314.11 million shares, up from 288.74 million on Monday.

Secondary stocks squeaked to another record high, with the NASDAQ composite index closing up 0.20 of a point at 707.15.

The market got a jump-start with the IBM news. IBM, a component of the Dow, surged to 53 1/4, propelling the key index sharply higher.

But while the timing of the announcement came as a surprise, the dividend cut had been widely expected. News that the embattled computer maker would replace John Akers after posting a record $5-billion loss for 1992 also appeared logical. IBM eventually sold off, ending the day at 49, up just 1/8.

“After that burst of excitement, there was little justification for IBM to barrel higher,” said Eugene Peroni, an analyst with Janney Montgomery Scott in Philadelphia.

Among the market highlights:

Merck fell 1 3/4 to 39 1/2. Its fourth-quarter earnings growth was solid but sales of its Mevacor drug slowed down and Merck provided cautious 1993 earnings guidance.

Other drug stocks that lost ground included Johnson & Johnson, off 1 3/8 to 43 5/8, Bristol-Myers, off 1 1/8 to 59 3/4, Pfizer, down 1 3/4 to 65 1/8 and American Home Products, off 7/8 to 64 1/8.

Topps Cos. slumped 3 3/4 to 8 1/2 after predicting a fourth-quarter loss on lower trading card shipments. Marvel, which has a baseball card division, lost 3 3/8 to 24 3/4 and Score Board eased 1 1/2 to 22 1/2.

Compaq Computer rose 1 7/8 to 56 5/8 after posting strong fourth-quarter results.

In overseas trading, London’s Financial Times 100-share average raced to a sharply higher close of 2,835.7, showing a gain of 63.8 points, or 2.3%, after a one-point cut in British interest rates.

Tokyo stock prices surged, with the 225-share Nikkei average rising 205.18 points to 16,492.63.

In Frankfurt, the 30-share DAX average ended at 1,576.16, up 6.92 points.

Credit

Prices rose for three consecutive days before the market experienced what one analyst called a “reality check” in advance of the Feb. 11 auction of 30-year bonds.

“The price levels in the market were not justified,” said Fred Sturm, senior economist at Fuji Securities Inc. in Chicago. “The driving force behind the recent rally was . . . little more than wishful thinking.”

The price of the long bond was down 25/32 point, or $7.81 per $1,000 in face amount. Bond prices and yields move in opposite directions.

Sturm said Tuesday’s $15.25-billion offering of two-year notes, which saw an extremely low number of bids accepted, was “a taste of things to come.”

Douglas McAllister, a government bond strategist at Prudential Securities Inc., said the market was further saturated by hedging from firms underwriting a $1-billion offering of 30-year Time Warner Inc. bonds.

The federal funds rate, the interest on overnight loans between banks, was 2.813%, down from 3.063% late Monday.

Currency

The dollar rose against most major currencies as interest rates continued to keep the foreign currency market fixated.

Curtis Perkins, a currency trader with Chemical Bank, said the currency market was influenced by remarks by German central bank officials who indicated that there wouldn’t be an immediate easing of German interest rates. He said the market was trading in a range before it ended generally higher.

Perkins noted that the Bank of England dropped its minimum lending rate by a full percentage point Tuesday to 6%, the lowest rate in nearly 15 years.

In New York, the British pound sold for $1.538, down from $1.557 late Monday. The pound tumbled after the Bank of England cut its rate, making the currency less attractive to foreign investors.

The dollar sold for 123.55 Japanese yen in New York, up from 123.45 yen late Monday. The greenback also rose to 1.577 German marks, up from 1.568.

Commodities

Crude oil futures slipped and other energy futures ended mixed on the New York Mercantile Exchange, with light, sweet crude for March delivery falling 2 cents to $19.64 a barrel.

Gold rose $2.30 to $331.10 an ounce on New York’s Commodity Exchange. Silver rose 1 cent to $3.702 an ounce.

Market Roundup, D6