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Fed rate fear based on higher bond yields { May 2007 } Original Source Link: (May no longer be active)
http://www.bloomberg.com/apps/news?pid=20601087&sid=a4cbR9DcNGXw&refer=homehttp://www.bloomberg.com/apps/news?pid=20601087&sid=a4cbR9DcNGXw&refer=home
U.S. Stocks Drop as Bond Yields Rise; Citigroup, Wal-Mart Fall
By Michael Patterson
June 7 (Bloomberg) -- The U.S. stock market plunged the most in three months after a jump in bond yields fueled speculation the Federal Reserve will raise interest rates.
Financial firms led by Citigroup Inc., Goldman Sachs Group Inc. and Merrill Lynch & Co. led a third day of declines. All 16 homebuilders in Standard & Poor's indexes dropped on concern that demand for mortgages will diminish. Wal-Mart Stores Inc., Macy's Inc. and J.C. Penney Co. retreated after May sales trailed estimates.
The slump ended three months of gains that this week sent the S&P 500 to its fourth straight record and the Dow Jones Industrial Average to its 27th of the year. Higher interest rates may lower profits, make takeovers more expensive and reduce the appeal of dividends.
``We're going through an interest rate reality check,'' said James Awad, who oversees about $1.3 billion as chairman of Awad Asset Management in New York. ``That's breaking the momentum of the market.''
The S&P 500 fell 26.66, or 1.8 percent, to 1490.70. The Dow Jones Industrial Average plummeted 198.94, or 1.5 percent, to 13,266.73. The Nasdaq Composite Index lost 45.80, or 1.8 percent, to 2541.38. Indexes extended their declines after oil prices climbed to almost $67 a barrel.
Benchmark 10-year note yields increased to 5.09 percent. Bond yields are increasing worldwide on signs global growth will accelerate.
Options on the fed funds rate show that as of yesterday, the odds of an increase to 5.50 percent are at almost 41 percent. A month earlier, the odds were zero.
`Spooked'
Financial companies in the S&P 500 fell 1.7 percent as a group and accounted for more than one-fifth of the index's decline. Citigroup, the biggest U.S. bank, dropped 81 cents to $52.52. Goldman Sachs, the largest securities firm by market value, lost $7.30 to $220.05. Merrill Lynch, the world's biggest brokerage, declined $3.07 to $87.26.
``Treasuries have now reached a point where they are starting to represent good value,'' said Larry Smith, who manages about $400 million as chief investment officer at Third Wave Global Investors in Greenwich, Connecticut. ``The stock market is going to get a little bit spooked.''
Wal-Mart
Wal-Mart slipped 99 cents to $49.76 after the world's largest retailer said sales at stores open at least a year, or same-store sales, gained 1.1 percent, on the low end of its forecast for a 1 percent to 2 percent advance.
Macy's, the No. 2 U.S. department-store chain, fell $1.07 to $38.43. Same-store sales declined 3.3 percent, missing analysts' estimates for a drop of 1.4 percent.
J.C. Penney retreated $3.40 to $77.79 after the third- largest U.S. department-store company said same-store sales fell 2 percent. Analysts projected a gain of 0.1 percent, according to Retail Metrics LLC.
Homebuilders slumped 4.2 percent as a group.
Lennar Corp., the largest U.S. builder by sales, declined $1.86 to $42.42. D.R. Horton Inc., the second biggest, fell 91 cents to $21.53.
Last Updated: June 7, 2007 16:16 EDT
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