Bond Yield Surge Batters Stocks

AT&T's deal for BellSouth fails to bring in buyers.
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Updated from 4:09 p.m. EST

Stocks closed to the downside Monday as soaring bond yields overshadowed a $67 billion mega-merger in the telecommunications industry.

The

Dow Jones Industrial Average

lost its hold on 11,000, falling 63 points, or 0.57%, to end at 10,958.59. The

S&P 500

gave up 8.97 points, or 0.7%, to 1278.26, and the

Nasdaq Composite

fell 16.57 points, or 0.72%, to 2286.03.

"There's worry about higher interest rates," said Barry Hyman, equity market strategist with Ehrenkrantz King Nussbaum. "The bond market has been very weak, and we can assume the higher interest rates are signs of a rebounding economy. This gives people a feeling of comfort, but we also worry about how rates are going to go and whether it will crimp economic activity further down the road."

The 10-year Treasury bond was down 13/32 in price to yield 4.74%, just 1 basis point below the yield of the two-year note and its highest level since June 2004. At the start of last week, the yield curve was inverted by as many as 13 points. The dollar was higher against the yen and euro.

"It wasn't a good day across a lot of sectors," said Paul Mendelsohn, chief investment strategist with Windham Financial. "The rise we saw in the 10-year Treasury spooked some investors today. With the yield curve flattening, it could translate into a slowdown in the housing market."

About 1.65 billion shares changed hands on the

New York Stock Exchange

, with decliners beating advancers by a 11-to-5 margin. Volume on the Nasdaq was 2.15 billion, with decliners outpacing advancers 5 to 4.

Shares of

AT&T

(T) - Get Report

eased after the company said it will acquire

BellSouth

(BLS)

for $67 billion in stock, or about $37.09 a BellSouth share. The combined company will be by far the biggest phone outfit in the U.S. as measured by market cap, and it represents the unification of Cingular's owners.

To view Gregg Greenberg's video take on today's market, click here

.

AT&T lost 97 cents, or 3.5%, to $27.02. Meanwhile, BellSouth surged $3.04, or 9.4%, to close at $34.50. After the acquisition news, the Nasdaq Telecom index rose 0.2% while the Amex Telecom index lost 0.5%.

The Dow, of which AT&T is a member, was also pressured by declines of 2% in

Alcoa

(AA) - Get Report

and

Honeywell

(HON) - Get Report

. Meanwhile,

General Motors

(GM) - Get Report

was one of the few components to finish in positive territory, rising 3.1%.

Tech shares weren't benefiting from Citigroup's upgrade of

Intel

(INTC) - Get Report

. The firm went to buy from hold even as its price target fell to $24 from $26. Intel's profit warning helped send the Nasdaq Composite down 0.4% Friday. Intel fell by 2 cents to $20.30.

Oil fell after the U.N.'s atomic regulator met to consider Iran's decision to restart nuclear testing. The issue has kept energy prices volatile over the last month as traders placed bets on the likelihood of sanctions against OPEC's No. 2 supplier. April crude finished the session down $1.26 to close at $62.41 a barrel.

The decline in oil had the Philadelphia Oil Service Sector index down 4% and the Amex Oil index lower by 2.7%.

On the economic front, the Commerce Department said U.S. factory orders fell 4.5% in January, compared with expectations of a 5.5% decline. Excluding transportation, factory orders rose 1.6% for the month.

General Electric's

(GE) - Get Report

NBC Universal confirmed a definitive agreement to acquire

iVillage

(IVIL)

for $8.50 a share in cash, or about $600 million. GE ended up 4 cents, or 0.1%, to $33.10, while iVillage added 38 cents, or 4.8%, to close at $8.36.

A number of other buyouts were reportedly in the works Monday, including a $3.2 billion bid for

Shurgard

(SHU)

by

Public Storage

(PSA) - Get Report

, and a $3.4 billion private equity takeover of

Education Management

(EDMC)

.

Shares of

Research In Motion

(RIMM)

rallied Monday after the company agreed to a $612.5 million settlement of its litigation with NTP Inc. The payout is slightly less than Wall Street had feared.

RIM also issued disappointing fourth-quarter profit guidance. The company expects 625,000 net subscriber additions, below December's 725,000-add target. RIM also said it expects to make 65 cents a share on revenue of $555 million for the quarter; it had previously estimated a 78-cent profit on revenue of $605 million. Shares finished up $10.84, or 15.14%, to $82.76.

Retailer

Kohl's

(KSS) - Get Report

said

J.P. Morgan

(JPM) - Get Report

will acquire its credit card business for $1.5 billion. Kohl's also said its board has authorized a $2 billion share-repurchase program to be completed over the next two to three years. Shares of Kohl's added $1.73, or 3.6%, to close at $50.53.

Elsewhere, Citigroup raised steelmaker

Nucor

(NUE) - Get Report

to buy from hold on the belief that imbalances in global steel are easing. Nucor tacked on $2.30, or 2.6%, to $90.05.

AG Edwards cut Dow component

3M

(MMM) - Get Report

to hold from buy, citing slower growth due to tougher pricing, consumer press and competition. The stock slid 93 cents, or 1.3%, to $71.95.

Overseas markets were higher, with London's FTSE 100 up 0.7% to 5898 and Germany's Xetra DAX rising 0.6% to 5754. In Asia, Japan's Nikkei rose 1.5% overnight to 15,901, while Hong Kong's Hang Seng rose 0.1% to 15,812.