FINANCIAL MARKETS : Bond Yields Up, Dollar Down on 7th Fed Increase

The Federal Reserve Board’s decision to move interest rates higher for a seventh time in 12 months sent bond yields sharply higher and the dollar lower Wednesday but had little effect on stocks, which inched higher.

Following quickly on the Fed’s hike, major banks raised their prime rates by half a percentage point to 9%.

The Treasury’s main 30-year bond yield rose to 7.74% from 7.69% on Tuesday, pushing its price, which moves in the opposite direction, down 19/32 point, or $5.93 per $1,000 in face value.

Market participants said Treasury yields shot up after the Fed increased its discount rate, the interest the bank charges on direct loans to commercial banks, to 5.25% from 4.75%. It also increased its target for the more important federal funds rate, the interest that banks charge each other, by half a point to 6%.

The Federal Open Market Committee also issued a statement that said signs of a slowdown in the economy were only “tentative.”

The announcement spurred the widespread selling spree--sending bond prices plunging--as investors reasoned the Fed’s statement suggested that inflation was still a threat and left the door open to further rate hikes.

Yields on three-month Treasury bills rose to 6.04% as the discount rose 0.05 percentage point to 5.88%. Six-month yields rose to 6.45% as the discount rose 0.05 point to 6.17%. One-year yields rose to 6.90% as the discount rose 0.11 point to 6.49%.

“The market had taken the dollar and bonds to an unsustainable level,” said Elena Shperling, chief trader at the New York branch of Banco di Sicilia, an Italian bank. “Now all of a sudden the realization is coming that the Fed isn’t done.”

A weakening in the dollar against major foreign currencies after the Fed raised interest rates also caused the bond market to react negatively, said Steven R. Ricchiuto, chief economist with Barclays de Zoete Wedd Government Securities Inc.

In New York trading, the dollar fetched 99.25 Japanese yen, down from 99.63 yen Tuesday. The dollar also changed hands at 1.519 German marks, down from 1.525 late Tuesday.

Traders said doubts about the effectiveness of President Clinton’s re-cobbled bailout plan for Mexico also weighed on the dollar after giving the currency a boost on Tuesday.

A weaker dollar can push up the price of imports into the United States, which can aggravate inflation and erode the value of fixed-income securities such as bonds.

Meanwhile, on Wall Street, the Dow Jones average managed to rise despite the drop in bond prices, adding 3.70 points to 3,847.56.

The blue chip index rose as much as 26 points early in the session in anticipation of the Fed’s action. It reversed field, backing off as much as 10 points with bonds, as relieved investors took profits immediately following the Fed’s tightening, but then recovered late in the day.

In the broader market, advancing issues led declines by about 4 to 3 on the Big Board, where volume totaled a heavy 395.32 million, just below Tuesday’s 409.56 million shares.

Broad market indexes also ended marginally higher.

Among the Wednesday’s highlights:

* The 30 Dow was led higher by Alcoa, up 1 3/4 to 80 3/8; IBM, up 1 1/2 to 73 5/8; and Boeing, up 1 3/8 to 45 7/8.

* So-called defensive stocks--those of drugs, food and other consumer product companies, rose in anticipation of the tightening but then fell in afternoon trading, as investors traded these names for the cyclical issues.

* Procter & Gamble fell 1 1/4 to 63 7/8; Minnesota Mining lost 1 3/8 to 51; and Eastman Kodak slid 1 3/8 to 47 5/8.

* Ford Motor Co. slipped 1/8 to 25 1/8 after rising earlier on its report of sharply higher fourth-quarter profits.

* General Motors gained 7/8 to 39 3/4, and Chrysler added 5/8 to 45 1/2.

* Reebok International lost 2 3/4 to 35 1/4 after its fourth-quarter profits came in below analysts’ forecasts.

* Mexican stocks pulled back on profit taking after soaring Tuesday on news of the aid package for the battered Mexican economy. Telefonos de Mexico fell 1 1/8 to 34 1/4, and Televisa slipped one to 23.

Mexico’s Bolsa index fell 96.19 points to 1,997.79 as investors took profits following the previous day’s euphoric rally.

Meanwhile, other overseas stocks closed higher with Tokyo’s 225-share Nikkei average index gained 89.65 points to close at 18,739.47. Frankfurt’s 30-share DAX average ended up 27.16 at 2,048.43 and London’s Financial Times 100-share average rose 25.7 points to 3,017.3.