FINANCIAL MARKETS : Bond Market Hammered; Stocks Decline : Market Overview

* Investors continued to flee the bond market Friday, pushing long-term interest rates to three-month highs on surprisingly strong economic news.

* Some blue-chip stocks surged as the good economic news outweighed the jump in bond yields. But the broad market finished lower for a third straight day.

Credit

News of a sharp rise in the nation’s trade deficit in September panicked many bond investors, who viewed the report as another sign of a faster-growing economy.

Interest rates surged across the board, with the 30-year Treasury bond yield posting the biggest increase: It closed at 6.33%, up from 6.24% on Thursday and the highest level since Aug. 13.

Among shorter-term bonds, the yield on five-year T-notes leaped to 5.16% from 5.07% on Thursday.

“It’s a real mess,” said Jim Kenney, bond trader at Prudential Securities. “There are no real buyers at the moment.”

The trade report showed the nation imported a record level of goods in September, a sign of higher spending by consumers and businesses.

Bond yields have been rising slowly since October as government reports have pointed to an economic rebound, which bond owners fear will hasten the day when the Federal Reserve Board is forced to tighten credit to keep inflation under control.

In fact, on Thursday the Europe-based Organization for Economic Cooperation and Development predicted the U.S. economy will expand at a brisk pace in 1994. The OECD recommended that the Fed raise short-term interest rates by 1.5 points over the next year or so to restrain growth and keep inflation in check.

Three-month T-bills now yield 3.19%. A rise of 1.5 points would push the T-bill rate to about 4.7%, which, in turn, would be expected to push other interest rates up. That is why many bond owners are selling now.

However, many economists still insist the economy’s pace won’t be strong enough in 1994 to merit a 1.5-point rise in short rates. They see growth, and rates, falling again in the first half of the year.

Other Markets

The broad market fell for a third straight day as bond yields rose.

But the Dow industrials shook off an early 28-point decline and closed up 8.67 points to 3,694.01, a gain of 9.50 points for the week.

Traders said news of economic strength is encouraging buying of industrial stocks whose earnings could soar in a better economy.

Still, the severe weakness in the broader market Friday and all week suggests that the bull market is tiring and could be poised for a sharp pullback, analysts said.

Losers topped winners by 13 to 8 on the Big Board on Friday, and most indexes except the Dow fell. The Nasdaq composite lost 2.78 points to 751.56, extending its loss for the week to 3.6%.

Among the market highlights:

* Industrial stocks boosting the Dow included Alcoa, up 1 3/4 to 70 1/4; GE, up 3/4 to 98 1/4; International Paper, up 1 to 65 1/8, and 3M Co., up 2 1/8 to 110 1/8. Other gainers included PPG Industries, up 1/2 to 71 1/8; Fluor, up 1 1/4 to 43 7/8, and Phelps Dodge, up 3/4 to 44 1/2.

* On the downside, many smaller growth stocks continued to be hammered. Iwerks Entertainment slumped 2 3/4 to 30 1/2, Callaway Golf lost 2 1/4 to 45, Outback Steakhouse slid 1 1/4 to 33 5/8 and coffee chain Starbucks fell 3/4 to 22 5/8.

* Bank stocks also tumbled as interest rates jumped. Citicorp shed 1 to 34, Chemical Bank fell 1/2 to 36 7/8, BankAmerica lost 1/2 to 41 1/2 and First Chicago slid 5/8 to 44.

In foreign markets, Mexico City’s post-NAFTA rally continued, with the Bolsa index rising 19.62 points to a record 2,185.66.

But Tokyo stocks plunged anew. The Nikkei index fell 225.13 points to 17,941.19, a 35-week low.

In other markets:

* The dollar rose on the economic news, closing at 1.717 German marks in New York, up from 1.713 on Thursday, and at 108.75 Japanese yen, up from 107.25.

* Gold futures added $1.60 to $378.00 an ounce on the Comex, while oil futures for December slipped 13 cents to $16.56 a barrel on the New York Merc.