U.S. Stocks Lower On Rates Jitters

NEW YORK (MarketWatch) -- U.S. stocks were lower on Friday, as concerns about rising interest rates globally, along with hedge-fund trouble linked to subprime mortgages, and rising crude oil prices, weighed on sentiment.

"There's lots of volatility in the market right now," said Mike Malone, trading analyst at Cowen & Co. "More than anything, it's concerns with what's taking place in the credit markets with all the issues about hedge funds and subprime mortgages."

"Until investors get an idea of how this could play out, we'll continue to be volatile," Malone said.

Investor focus, meanwhile, was also set on the initial public offering of private-equity firm the Blackstone Group. Blackstone shares jumped 18% to $36.50 within their first official trades. The offering raised $4.13 billion early Friday by pricing at the top of its estimated range as the sixth richest IPO in U.S. history.

The Dow Jones Industrial Average was down 67 points at 13,477, as 27 of its 30 components opened in the red, led by the likes of Alcoa Inc. , Boeing Co. and Citigroup Inc. .

The S&P 500 index fell 7.8 points to 1,514, while the Nasdaq Composite dropped 10.8 points to 2,605.

Trading volumes showed 442 million shares on the New York Stock Exchange and 532 million shares trading on the Nasdaq stock market. Declining issues topped gainers by 21 to 8 on the NYSE and by 16 to 9 on the Nasdaq.

By sector, natural gas , utilities , semiconductors , and biotechnology , while oil services and internet were among the few rising sectors.

Among leading tech shares, eBay Inc. gained 3.9%. According to the New York Times, it's planning to return to the Chinese auction market this summer.

U.S. stocks finished higher after a volatile session Thursday, as a drop in crude oil prices helped to offset concerns about rising bond yields and allowed the market to rebound from the previous session's stumble.

Expectations that global growth is fueling inflation and putting upward pressure on interest rates has capped the advance of stocks in recent weeks.

U.S. bond yields have risen above 5%, offering a risk-free alternative to stocks, while also lifting borrowing costs for consumers and businesses.

On Friday, the benchmark 10-year bond was down 4/32 at 94 19/32, lifting its yield to 5.206%.

Rates overseas

Investors also remain weary that Chinese financial authorities will continue to announce tightening measures, possibly over the weekend, as they have in recent times.

Declines were seen in Asia and Europe, with the Shanghai Composite losing over 3% amid fears of an imminent rate hike.

Hedge fund woes

Low interest rates globally over the past 5 years has allowed an unprecedented surge financial liquidity, which central banks the world over are still busy mopping up by lifting interest rates.

Fast-money investors, such as hedge funds, have heavily borrowed money at low rates to invest in higher yielding assets. Private equity funds have also borrowed heavily to buy out publicly-traded companies, fueling overall gains in the stock market.

But with rising rates, there are now concerns that the party may soon be over, according to Cowen's Malone.

"It's no secret that there's been a lot of leverage," Malone said. "But if investors begin to unwind their trades to reduce their leverage, that could have a big impact on markets."

Jitters in the credit markets were fueled by the collapse of two Bear Stearns hedge funds which invested in subprime mortgages. Barclays on Friday said it has "some exposure" to such funds but that any loss it takes won't be material.

Bear Stearns, meanwhile, plans to take out $3.2 billion in loans to stop creditors from seizing assets of its money-losing hedge funds, Bloomberg News reported Friday, citing people with knowledge of the proposal.

Merrill Lynch already has seized $850 illion of securities that Bear Stearns used as collateral, according to reports.

Shares of broker/dealers were broadly falling on Friday.

By Nick Godt