Stocks Advance Despite Jump in Bond Yields

A disappointing Treasury note auction undercut a powerful rally in blue-chip stocks Tuesday, but once again the broader market showed surprising strength despite rising interest rates.

The Dow Jones industrial average reached an intraday peak of 11,102 before higher bond yields triggered selling. The Dow closed up just 18.90 points at 11,026.15.

But the Nasdaq composite surged 1.6%, and the Standard & Poor’s index of 600 smaller stocks rose 0.7%, reflecting broad-based buying.

Winners topped losers by 17 to 13 on the New York Stock Exchange and by 22 to 17 on Nasdaq.

The Treasury bond market, which has been riled in recent weeks by fears of rising inflation amid a global economic recovery, had another bad day.

The yield on the bellwether 30-year T-bond rose from 5.79% on Monday to 5.83% on Tuesday--highest since last May 27--after the Treasury’s auction of $15 billion in five-year notes went poorly.

The yield on the notes was 5.37%, above expectations. More striking was that the government received orders worth just 1.74 times the notes it sold--the lowest “bid-to-cover” ratio for five-year notes since May 1981, according to Lou Crandall, economist at R.H. Wrightson & Associates.

Many investors are reluctant to buy long-term government bonds because they fear that a stronger economy will prompt the Federal Reserve to raise interest rates sooner than later.

“Fixed income is in a bear market and will remain so for a while,” said Stanley Druckenmiller, manager of the $6.75-billion Quantum Fund, the flagship fund of billionaire George Soros’ Soros Fund.

But the stock market isn’t taking much notice. Although high-priced growth stocks have been sliding recently, many other stocks have continued to advance on optimism about the economy.

Still, “As interest rates push up, it presents an incredibly risky environment for stocks,” said John Bartlett, senior portfolio manager for Commerce Funds in St. Louis. Bartlett reduced the equity weighting in the firm’s model portfolio to 48% from 60% in recent days.

Stocks will be tested again today when the Treasury auctions another $12 billion of securities, this time in 10-year notes.

Among Tuesday’s highlights:

* Retail stocks were led higher by Wal-Mart, up $2.13 to $47.31, after the company released an earnings report that beat Wall Street forecasts. Home Depot gained $2.88 to $59.25. Prudential Securities upgraded the stock.

* Technology stocks rose amid a rebound in Internet issues. America Online surged $13.13 to $141.44 after the company struck alliances with four television companies.

Morgan Stanley analyst Mary Meeker upgraded AOL stock, saying the company should be able to stake out a leadership in the new multichannel, high-speed communications arena while still finding plenty of support for its traditional dial-up Internet service.

Net stocks were also boosted by a strong debut for The Street.com, an online news service whose stock soared $41 to $60 on Nasdaq.

Net shares surging included Yahoo, up $18.31 to $174; DoubleClick, up $5.38 to $130.44; and USWeb, up $2.38 to $26.31.

* Some major growth stocks rebounded, including Eli Lilly, up $2.50 to $75.81; Clorox, up $1.56 to $105.69; and GE, up $2.19 to $110.94. Also, Nike jumped $2.69 to $65.50 after being raised to “recommended list” from “market outperform” by an analyst at Goldman Sachs.

* Paper companies slumped after a monthlong rally by cyclical stocks fueled by optimism for a recovery in Asia. International Paper, the world’s biggest paper company, fell $2.25 to $53.88, Georgia-Pacific fell $3.94 to $87.81 and Champion International slid $4.06 to $56.94.

Market Roundup, C13