Bond yields rattle Wall St., Dow down 140

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NEW YORK -- A surge in Treasury yields rattled Wall Street Wednesday, forcing stocks to give up early gains and drive down the Dow Jones industrial average more than 140 points.

The 10-year Treasury note's yield soared to 5.15% late Wednesday from 5.09% late Tuesday, reigniting worries among stock investors that high rates could thwart corporate deal-making and further injure the limping housing market.

The stock market started reacting violently to Treasury yields two weeks ago when the 10-year yield surged past 5% for the first time since last summer. Wall Street had traded more mildly in recent days as yields retreated from last week's peak of nearly 5.30%, but Wednesday's yield advance stoked fears that they could resume their climb.

"People are watching this 10-year, and it looks like it might want to go back to 5.25," said Todd Leone, managing director of equity trading at Cowen & Co. Until last week, the 10-year Treasury yield had not traded consistently above 5.25% since 2002.

Furthermore, Leone said, the private equity deal-making wave, which was a main driver for the market for several weeks, seems to have slowed down a bit compared to last month. "The guys are doing a little more homework, and there aren't as many companies to grab up."

Home Depot's $22.5 billion buyback Wednesday initially lent some support to the market, as did stronger-than-expected quarterly earnings from Morgan Stanley and a retreat in oil prices. But the market eventually caved, after investors decided the positive news wasn't enough to warrant a return to record territory.

Troubles at two of Bear Stearns Cos.' hedge funds also weighed on the markets, especially financial firms: Bear Stearns, JPMorgan Chase & Co. and Merrill Lynch & Co. all fell more than 2%.

The Dow fell 146.00, or 1.07%, to 13,489.42, after bobbing in and out of positive and negative territory earlier in the day.

Broader stock indicators also tumbled. The Standard & Poor's 500 index declined 20.86, or 1.36%, to 1,512.84, and the Nasdaq composite index fell 26.80, or 1.02%, to 2,599.96.

Home Depot, one of the 30 Dow components, rose $1.76, or 4.6%, to $40.03 after announcing it will buy back more than a quarter of its shares and sell its Home Depot Supply business to a group of private equity firms for $10.3 billion. The decisions are not only likely to increase the retailer's profit, they also bolster the idea that stocks, despite their big run-up this year, have further to climb. Cutting the number of shares outstanding typically lifts a company's stock price, because less stock on the market raises the value of each share, and it makes key ratios such as earnings per share look stronger.

Another positive piece of news was FedEx Corp.'s report that its fiscal fourth-quarter profit rose 7%, boosted by an 8% increase in revenue and higher package volumes. FedEx rose $1.74 to $109.80.

Morgan Stanley also posted a strong rise in quarterly profit, but the second-largest U.S. investment bank turned lower by 48 cents to $87.32 as rest of the financial sector wilted.

In other corporate news, Nuveen Investments Inc. rose $8.98, or 16.6%, to $63.14, after the investment manager said it agreed to be acquired by a private equity group led by Madison Dearborn Partners LLC for $5.42 billion in cash.

But in a sign that takeover activity might be cooling, billionaire Kirk Kerkorian's investment arm said it was ending discussions to potentially buy MGM Mirage's Bellagio hotel-casino and CityCenter project. The casino operator fell $5.90, or 7.1%, to $80.38.

Wednesday was light on economic data, but Thursday will bring the Labor Department's weekly jobless claims report, the Conference Board's index of leading economic indicators and the Philadelphia Federal Reserve's June index of business activity. The reports have the potential to move the Treasury markets.

Last week, applications for home loans fell 3.4% as mortgage rates -- closely tied to the 10-year Treasury yield -- increased, the Mortgage Bankers Association said Wednesday.

Larry Peruzzi, senior equity trader at The Boston Company Asset Management, noted that while high yields are worrisome, the yield curve is more normal now, which should be positive for stocks going forward.

The yield curve is the difference between short-term yields and long-term yields; the rise in long-term bond yields has made the relationship more typical, rewarding long-term risk with higher returns. The pattern now suggests "steady growth -- not spectacular, but somewhat steady," said Peruzzi. Before, the yield curve had pointed to a slowdown in growth.

The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude oil futures dipped 91 cents to $68.19 a barrel on the New York Mercantile Exchange, and gasoline futures also retreated. The government said Wednesday in its weekly inventory report that crude oil stockpiles rose 6.9 million barrels last week and gasoline stockpiles rose 1.8 million barrels.

Declining issues outnumbered advancers by more than 3 to 1 on the New York Stock Exchange, where volume came to 1.67 billion shares, up from 1.46 billion Tuesday.

The Russell 2000 index of smaller companies fell 12.16, or 1.43%, to 836.18.

Overseas, Germany's DAX index rose 0.71% to an all-time high, its first record close since March 7, 2000. Japan's Nikkei stock average rose 0.26%, Britain's FTSE 100 slipped 0.01%, and France's CAC-40 rose 0.36%.
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