U.S. Stocks Extend Decline; Yen Advances to Three-Month High

The U.S. stock market's worst slide in four years continued for a third day on growing concern that bank earnings growth will diminish as defaults increase.

The weeklong rout in equities worldwide pushed yields on U.S. Treasuries to levels reflecting expectations the Federal Reserve will cut interest rates this year. The yen reached the highest in almost three months against the dollar.

Countrywide Financial Corp., Merrill Lynch & Co. and Citigroup Inc. led financial shares to their lowest since October, dragging the Standard & Poor's 500 Index and Dow Jones Industrial Average to their eighth decline in nine days.

``Is there a big disaster looming in the mortgage market -- that's clearly the concern right now,'' said Dan Veru, who helps manage $2.8 billion at Palisade Capital Management in Fort Lee, New Jersey. ``It's whether it can spread into the prime lenders and are we going into a down credit cycle.''

The S&P 500 lost 13.05, or 0.9 percent, to 1374.12. All 10 of its industry groups retreated. The Dow average slipped 63.69, or 0.5 percent, to 12,050.41. The Nasdaq Composite Index decreased 27.32, or 1.2 percent, to 2340.68. All three benchmarks closed at their lowest since November.

The market extended last week's slump, which had pushed the S&P 500 down 4.4 percent, amid a global selloff spurred by concern that share prices have climbed too high during a four- year rally. Today, the Morgan Stanley Capital International Asia-Pacific Index slid 2.8 percent to a two-month low, while Europe's Dow Jones Stoxx 600 Index retreated 1.2 percent.

New Century Financial Corp., which lends to property buyers with poor credit, tumbled the most ever after JPMorgan said a criminal probe may push it into bankruptcy.

`Difficult Time'

Investors got another reason to avoid stocks after the Institute for Supply Management said half of 18 industries surveyed last month, including construction, finance and retailing, reported slower sales.

``The market's going to have a difficult time making progress,'' said Michael Vogelzang, who helps manage $2.4 billion as chief investment officer of Boston Advisors LLC in Boston. ``We're going to have slowing earnings growth and the market has a very, very difficult time making headway when that's the case.''

A gauge of financial shares in the S&P 500 dropped 1.6 percent and was the biggest drag on the index. Countrywide, the biggest U.S. mortgage lender, lost $1.82 to $35.20. Merrill fell $2.19 to $79.97. Citigroup, the largest U.S. bank, dropped 72 cents to $49.25.

New Century, the second-biggest U.S. originator of subprime mortgages, tumbled $10.09, or 69 percent, to $4.56. Investigators are focused on its accounting and trading in its securities, the company said in a regulatory filing. New Century may need waivers from its own lenders to stay in business, JPMorgan analyst Andrew Wessel wrote in a note to clients.

Riskiest Borrowers

Fremont General Corp. slumped $2.82, or 32 percent, to $5.89. The company put some of its residential loan staff on paid leave ``pending further information'' and said it won't make any more subprime mortgages.

Investors are growing skeptical that lenders to the riskiest borrowers will achieve profit forecasts after more than 20 subprime lenders were forced to close down or sell assets since the start of 2006. Late payments on mortgages last quarter climbed to the highest in four years.

Lehman Brothers Holdings Inc. today downgraded the mortgage-finance group to ``neutral'' from ``positive.'' London- based HSBC Holdings Plc said the U.S. subprime market is ``unstable'' and now in a ``downturn,'' making it the main drag on its earnings.

Fed Rate Cuts?

The yield on two-year U.S. Treasury notes briefly went below those of 10-year notes for the first time since August, signaling investors expect Fed rate cuts. Short-term yields are more sensitive than long-term ones to changes in the central bank's target for the overnight lending rate between banks. U.S. notes erased earlier gains to finish little changed.

The flattening of the so-called yield curve indicates ``the Fed may ease sooner rather than later,'' said Sharon Stark, chief fixed-income strategist in Baltimore at Stifel Nicolaus & Co. ``Bond yields are probably not sustainable unless we get some sort of signal from the Fed that they are willing to act.''

The yield on the two-year note was unchanged at 4.53 percent at 4:04 p.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 3/4 percent security maturing in February 2009 was unchanged at 100 13/32. The 10- year note's yield rose less than 1 basis point to 4.50 percent.

The difference between two- and 10-year yields narrowed to 3 basis points after the yields converged earlier. The spread last week shrank 10 basis points, the biggest contraction since the week ended September 2005, after Hurricane Katrina hit the U.S. Gulf of Mexico coast. The yield curve inverted to as much as 19 basis points on Nov. 27.

Rate-Cut Odds

Interest-rate futures contracts show traders project about a 32 percent chance the Fed will lower its benchmark rate to 5 percent from 5.25 percent at its May meeting and a 78 percent chance at its June meeting. As recently as Feb. 14, traders saw no chance of a rate cut by May.

``I haven't been in the rate-cut camp, but for the first time in a while I think the chance of a rate cut is higher than the market is pricing in,'' said Tony Crescenzi, chief bond- market strategist at Miller Tabak & Co. in New York.

The yen gained against the U.S. currency as stocks worldwide extended their slump, prompting investors to unwind riskier investments funded by borrowing in Japan.

Investors exited so-called carry trades in which they borrow cheaply in Japan to buy higher-yielding assets elsewhere, taking advantage of the lowest borrowing costs among major economies.

`No Argument to Sell'
``Investors are cutting back their risk exposure,'' said Max Tessier, vice president of currency management at CIBC Global Asset Management in Montreal, which manages $2 billion in currency assets. ``Carry trade is running against investors. There is no argument to sell the yen right now.''

The yen rose 0.9 percent to 115.77 per dollar at 4:05 p.m. in New York from 116.80 on March 2. It touched 115.15, the strongest since Dec. 8.

Traders who borrowed the currency to finance their investments in foreign corporate bonds and emerging-market assets had to buy back the yen to pay their debt financed in Japan, pushing the unwinding of the carry trade. The rise in implied volatility, a measure of how much investors expect the yen to fluctuate, also discouraged the carry trade.

Oil Prices

Crude oil fell for a second day in New York on speculation global economic growth will slow, curbing fuel demand. The global stock decline began last week in China, the world's second-biggest oil consumer. Crude oil sank close to $10 a barrel in December 1998, when falling demand in Asia left a glut of oil on the market.

``The selloff in crude is being tied to the stock market, which makes sense if you look at the stock market as a gauge of the broader economy,'' said Eric Wittenauer, an energy analyst at A.G. Edwards & Sons Inc. in St. Louis. ``Slower economic growth, especially in Asia, is very worrisome for the crude oil market.''

Crude oil for April delivery fell $1.57, or 2.6 percent, to close at $60.07 a barrel on the New York Mercantile Exchange.