Bonds, Stocks Rally as New Reports Show Low Inflation

Bonds staged their biggest rally in six months Thursday after reports on labor costs and economic growth showed low inflation, quelling concerns that the Federal Reserve Board might soon raise bank lending rates.

Stocks surged, led by General Electric, Coca-Cola and BankAmerica, after the economic reports suggested that interest rates will remain tame and earnings robust.

The benchmark 30-year Treasury bond rose 1 21/32, or $16.56 per $1,000 bond, to 102 12/32, the biggest gain since Oct. 27. The yield fell 13 basis points to 5.94%.

“Investors got the green light to buy,” said Hugh Whelan, who manages $6 billion of bonds at Aeltus Investment Management in Hartford, Conn. He purchased 10-year Treasury bond futures contracts and older 30-year bonds, and said yields may fall as low as 5.65% in coming months.

The Dow Jones industrial average rallied 111.85 points to 9063.37, its biggest gain in four weeks.

The Standard & Poor’s 500 index rose 17.12 points to 1111.75, finishing the month with a 1% gain. The Nasdaq composite index jumped 16.77 points to 1868.41.

“Profits are going to be stronger than everybody looked for without pushing up inflation, and that’s an ideal environment” for stocks, said George Cohen, chief investment officer at Cohen, Klingenstein & Marks, which manages $2 billion.

The U.S. employment cost index rose 0.7% in the first quarter, less than the 0.9% analysts had expected, the Labor Department reported. The index is the broadest measure of changes in wages, salaries and benefits.

The government also said the economy grew at a surprisingly strong 4.2% annual rate in the first quarter. Even so, the inflation component of the growth report rose at a 0.9% annual rate, the smallest increase since 1964. That’s good for bonds because rising inflation erodes their value.

“These are excellent numbers for the market,” said Andrew Brenner, head of global fixed-income trading at Fimat USA Inc. “How can the Fed even lean toward tightening when we have no inflation?”

Treasury securities recovered all the losses suffered earlier this week, which were sparked by a Wall Street Journal report saying that the Fed had adopted a bias toward raising rates at its meeting on March 31.

The Fed last raised its target for overnight lending more than a year ago, by 25 basis points to 5.5%. Policymakers next meet on May 19.

Bonds also got a lift after the Chicago branch of the National Assn. of Purchasing Management said its April factory index fell to 58.6 from 59.5 a month earlier, a sign of slowing growth in the Midwest.

The national purchasing managers’ April index, due out today, is likely to show a decline to 53.9 from 54.8 in March, according to the average forecast of analysts surveyed by Bloomberg News. “I’m really bullish on bonds right now,” said Alan Day, who helps manage $2.1 billion at Stratevest Group in Burlington, Vt. He sees 30-year bond yields falling as low as 5.60% in the second half of the year. “Inflation fears are a little overstated,” he said.

Only three days ago, stocks were reeling amid speculation the Fed would ramp up borrowing rates to stem inflation. Thursday’s reports diminished that prospect.

“This is great news for the stock market,” said George Jennison, managing director in charge of Nasdaq trading at Wheat First Union. “The stock market is linked by the hip to the bond market, so we’re going to follow the bonds higher.”

GE rose $2.81 to $85.13, Coca-Cola rose $2.13 to $75.81 and BankAmerica gained $3.25 to $85.25.

Among market highlights:

* American Express rose 94 cents to $102.19 after the provider of travel and financial services said it is dropping out of the competition to provide purchasing and travel cards for U.S. government accounts because the business isn’t profitable enough.

* Dell Computer rose $3.13 to $80.75 after the computer company said it and Intel are collaborating on initiatives for developing future Internet technologies. Intel, which cut prices on its Pentium and Pentium II processors for portable computers by up to 42% on Wednesday, rose 69 cents to $80.81.

* BellSouth rose 19 cents to $64.19 after the phone company and Germany’s Veba and RWE said BellSouth will take a 15.5% stake valued by analysts at $558 million in their telecommunications venture.

Market Roundup, D5

* WHAT ASIA?: The U.S. economy surged ahead in the first quarter. A1