May 24, 2007 / 9:50 PM / 13 years ago

REFILE-GLOBAL MARKETS-Bond yields jump, stocks fall on rate view

(Refiles to restore dropped word ‘lost’ in paragraph 11)

By Steven C. Johnson

NEW YORK, May 24 (Reuters) - U.S. government bond yields climbed neared four-month highs on Thursday after a surge in new home sales reduced chances of an interest-rate cut, while the dollar hit a six-week high against the euro.

But rate-sensitive utility stocks and losses in the technology sector led U.S. stock indexes lower, as did a round of profit-taking ahead of a three-day holiday weekend.

Stock investors have been hoping the Federal Reserve would cut interest rates this year to encourage economic growth, and some analysts feared recent strong data could spur inflation and cause the Fed to push rates higher instead.

Oil in London, meanwhile, touched a nine-month high above $71 a barrel on potential supply interruptions in Iran and Nigeria.

Gold hit a nine-week low in New York.

The U.S. Commerce Department said new single-family home sales rose 16.2 percent in April, their fastest pace in 14 years, though prices fell a record 11 percent in the same period.

The report, together with a sharp upward revision to March durable goods orders, bolstered the view that the Federal Reserve may not have to cut interest rates this year.

The data helped push yields on U.S. Treasury debt, which move inversely to their prices, to the highest levels since January. But a sharp sell-off in the stock marketneutralized that move in late trading and ultimately left prices little changed from late Wednesday.

“The market was due for a bounce,” said Edward O’Brien, senior vice president of fixed income at Keefe, Bruyette & Woods in New York. “Treasuries rallied when the stock market sold off. Rates have gone up so stocks fizzled out.”

The 10-year Treasury note US10YT=RR finished up 1/32 in price at 97-9/32 for a yield of 4.85 percent, unchanged from late Wednesday, and 5 basis points below its intraday peak at 4.90 percent.

The Dow Jones industrial average .DJI lost 84.52 points, or 0.62 percent, to end at 13,441.13. The Standard & Poor's 500 Index.SPX slid 14.77 points, or 0.97 percent, to finish at 1,507.51.

Technology shares weighed on the Nasdaq Composite Index .IXIC, which fell 39.13 points, or 1.52 percent, to close at 2,537.92.

Data storage company Network Appliance Inc. NTAP.0 was the biggest drag on the Nasdaq, shedding 16.6 percent to $31.76 after the company forecast an unexpected downturn in revenue tied to slower U.S. technology spending.

UTILITY STOCKS, UNPLUGGED

The jump in the 10-year note’s yield shortly after the mid-morning release of the new home sales data helped diminish demand for utility stocks. The steady dividends paid by utility stocks often serve as a substitute when Treasuries offer unattractive returns.

“People are coming to grips with the idea that not only are there not going to be rate cuts any time soon, but if the 10-year Treasury (yield) goes much higher, then people are going to start talking about the Fed lifting rates again,” said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis.

European shares followed U.S. stocks lower, with the FTSEurofirst 300 index .FTEU3 dropping 0.7 percent to end at 1,597.86. Japan's Nikkei 225 average .N225 closed little changed at 17,696.97.

DOLLAR AND OIL RISE

The dollar initially rallied on the housing data, briefly hitting a six-week high. The euro slid to $1.3415EUR=, the lowest since April 11, on electronic trading system EBS. At the end of the day, the euro traded at $1.3424, down 0.27 percent from late Wednesday.

The euro has slipped more than 2 cents from a record high hit last month, a move that has coincided with strong U.S. data and falling expectations of a Fed rate cut.

Eurodollar futures now reflect less than a 50 percent chance that the Fed will lower its benchmark fed funds rate from 5.25 percent by the end of 2007. Earlier this year, more than a quarter-point rate cut was fully priced in.

But some analysts are skeptical that the dollar has much more room to climb against the euro, particularly with euro-zone interest rates expected to rise at least once more this year.

“The dollar has been trading higher for nearly a month now and we think most of the position squaring that’s helped it is already done,” said Marc Chandler, senior currency strategist at Brown Brothers Harriman in New York.

The stronger dollar drove gold prices down to a nine-week low in New York. COMEX gold for June delivery GCM7 dropped $9.30, or 1.4 percent, to settle at $653.30 an ounce, after falling to a session low at $651.50, the weakest level since March 15.

Oil prices also weighed on stocks, with London Brent crude LCOc1 hitting a nine-month high at $71.80 on concerns about supplies from Iran and Nigeria.

U.S. warships in the Gulf off Iran’s coast and a worker strike at Nigeria’s state oil company sparked the rally.

But brimming inventories pushed U.S. crude futures down $1.59 to $64.18 per barrel CLN7 as refinery outages were seen depressing demand and boosting inventories. (Additional reporting by Kristina Cooke, Richard Leong, David McMahon, Gene Ramos and Frank Tang in New York, Amanda Cooper in London and Eriko Amaha in Tokyo)

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