Stocks close lower as rate fears return

NEW YORK » Stocks closed mostly lower yesterday on resurgent fears of rising interest rates. Investors sold as bond yields remained high, government data showed wages rising and a Federal Reserve official warned more interest rate hikes may be needed.

Wall Street was nervously watching the Treasury market after yields surged Monday to their strongest level since June 2004, pushed up by investor worries about inflation in the United States and rising interest rates in Japan and Europe. The yield on the 10-year Treasury note Tuesday fell to 4.73 percent from 4.74 percent late Monday.

Rising interest rates would not only make loans to consumers and businesses more expensive, they could also make bonds a more attractive investment than stocks.

"It seems like the stock market is finally recognizing what happened to the bond market," said Frank Gannon, senior equity portfolio manager, AIG SunAmerica Mutual Funds.

The Dow Jones industrial average rose 22.10, or 0.2 percent, to 10,980.69. The 30-stock index gained as companies such as Honeywell International Inc. and Procter & Gamble Co. rose. The Dow Jones industrial average fell 63.00, or 0.57 percent, on Monday.

Broader stock indicators were lower. The Standard & Poor's 500 index fell 2.38, or 0.19 percent, to 1,275.88, and the Nasdaq composite index fell 17.65, or 0.77 percent, to 2,268.38.

Declining issues led advancers by nearly 3 to 1 on the New York Stock Exchange.

In economic news, wage pressures accelerated at the fastest pace in a year, according to Labor Department data, intensifying inflation concerns. Revised figures from the Labor Department showed the efficiency of American workers declined in the final three months of 2005, the first time that has happened in more than four years.

Analysts said investors were also spooked by a hawkish interview with St. Louis Fed President William Poole, published by the Reuters news service. "Should we get the data in coming months that are consistently strong, particularly if there are substantial upside surprises, then that says we're going to have to step a little harder on the brake," he said. Poole is not a voting member of the policy-making Federal Open Markets Committee this year.

Poole's comments and a Lehman Brothers forecast of 5.5 percent federal funds rates, up from the current rate of 4.5 percent, has convinced Wall Street that interest rates are going higher than investors had hoped.