Dow off 24 on interest rate, inflation fears

NEW YORK - Stocks fell moderately yesterday after the government sold $19 billion in 10-year Treasury notes in a relatively weak auction. There were plenty of bidders, but the government had to lure them in with a higher yield than the market anticipated.

Investors are concerned the government's debt load is growing so large that it will lead to higher inflation and soaring interest rates. Higher interest rates could hamper the economy's recovery by raising borrowing costs for consumers, while inflation could also discourage them from spending.

A weakening dollar has also contributed to the concerns about interest rates, because it can lead to higher prices for imported goods, putting pressure on the Federal Reserve to hold inflation in check by raising short-term interest rates.

The dollar's slump has also stirred inflationary worries by driving up prices for key commodities such as oil, which can trigger higher prices everywhere. The price of crude rose above $71 a barrel yesterday, its highest level this year.

Jeffrey Frankel, president of Stuart Frankel & Co. Inc., said the Treasury auction rattled some traders. But he added that several cautious pullbacks in a stock market that went nearly straight up for three consecutive months are not necessarily a bad thing.

The Dow fell 24.04, or 0.27 percent, to 8,739.02 after sliding as much as 123 points. The S&P 500 index fell 3.28, or 0.35 percent, to 939.15. The Nasdaq composite index fell 7.05, or 0.38 percent, to 1,853.08.

The Dow has been waffling around 8,700 this month, just below where it started the year, after its massive three-month rebound from 12-year lows reached in early March.

"We're going to need to have more positive news on the economic front to make another push higher," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research.

Bonds weakened as Brazil joined China and Russia in saying it was interested in buying International Monetary Fund bonds as a way to broaden its holdings beyond the dollar. Brazil's finance minister said it was considering buying $10 billion in IMF bonds. That could mean fewer countries show up at Treasury auctions.

Stephen Wood, chief market strategist for North America at Russell Investments, said inflation was just one of the unknowns as traders tried to determine how quickly the economy might recover.

"The market was priced for perfection a year and half ago, and you had a market that was priced for Armageddon last September, and now you have something priced in between," Wood said.

In other trading, the Russell 2000 index of smaller companies fell 4.22, or 0.80 percent, to 523.71.

Japan's Nikkei stock average rose 2.1 percent. Britain's FTSE 100 gained 0.7 percent, Germany's DAX index rose 1.1 percent, and France's CAC-40 rose 0.6 percent.