Bond Yields Rise on Job Gains; Stocks Slip

Stocks ended mostly lower Friday, led by interest-rate-sensitive shares, as Treasury bond yields jumped on news of stronger-than-expected job growth in July and as oil prices hit another record high.

The damage to most major market indexes was relatively minor, suggesting that many investors considered the economic data to be good news for stocks.

The Dow Jones industrial average lost 52.07 points, or 0.5%, to 10,558.03.

Soaring demand for shares of Chinese Internet search engine Baidu.com, which rocketed from $27 to $122.54 on its first trading day, showed that many investors were eager to get in on hot growth stories.

Still, the broad market’s decline Thursday and Friday was enough to make for the first down week after five weeks of gains.

The jump in bond yields reflected the main concern of the last 12 months: How high will the Federal Reserve raise interest rates to rein in the economy?

The Fed meets Tuesday, and the July employment report left no doubt that the central bank would raise its benchmark short-term rate to 3.5% from 3.25%, the 10th increase since June 2004.

“The economy is on solid footing,” said Robert Gahagan, who oversees $8.5 billion in taxable fixed-income funds at American Century Investments in Mountain View, Calif. “This means higher rates.”

Investors sold bonds, driving their prices lower and their yields up. The two-year Treasury note, which is sensitive to the Fed’s rate moves, jumped to a four-year high of 4.11% from 4.03% on Thursday.

The 10-year T-note yield ended at 4.39%, up from 4.31% on Thursday and the highest since April 11.

A Reuters poll Friday of major Treasury bond dealers found that 10 expected the Fed’s key rate to be at 4% by year’s end, eight predicted 4.25% and three predicted 3.75%.

On Wall Street, stocks fell early in the day, responding to higher bond yields, then drifted in a narrow range the rest of the session.

The Standard & Poor’s 500 index lost 9.44 points, or 0.8%, to 1,226.42. Home builders were among the biggest losers on concerns about higher mortgage rates. Toll Bros. lost $3.93 to $50.95, and Pulte Homes sank $2.73 to $89.95. Bank and utility shares also slumped

The technology-heavy Nasdaq composite gave up 13.41 points, or 0.6%, to 2,177.91. It was supported by Microsoft, which bucked the downtrend, adding 44 cents to $27.76.

The Russell 2,000 small-stock index slid 9.05 points, or 1.4%, to 662.79.

Falling shares outnumbered winners by more than 3 to 1 on the New York Stock Exchange and by more than 2 to 1 on Nasdaq.

For the week, the Dow lost 0.8%, the S&P; 500 fell 0.6%, the Nasdaq dipped 0.3% and the Russell slid 2.5%.

The S&P; and Nasdaq indexes had hit four-year highs this week, fueled by recent upbeat economic data and strong corporate earnings reports.

Market bulls say investors can handle higher interest rates as long as earnings keep rising.

But the market faces a continuing challenge from energy prices: Near-term crude futures in New York rose 93 cents to a record high of $62.31 a barrel as traders focused on supply worries.

“You would think these prices would cause demand to go down, but we just haven’t seen it yet,” said Alan Wright, vice president of supply for Pilot Travel Centers in Knoxville, Tenn., which owns 270 truck stops.