NEW YORK - The $200-billion junk bond market survived a day of jitters Tuesday after the nation's biggest broker of high-yield securities said it planned to seek refuge from creditors under federal bankruptcy law protection. The market's resilience under the circumstances given its recent steep slide surprised some analysts, who had predicted a free fall after Drexel Burnham Lambert Inc.'s announcement Monday that it was seeking a merger partner and needed money.
The stock market reacted strongly to the news of Drexel's likely demise. Stocks opened lower after the federal government announced robust retail sales figures for January, and then took a sharp dive after Drexel said it might seek federal bankruptcy court protection for most of the investment firm's operations.
Prices for blue chip stocks began to come back slowly as the market digested both developments. However, analysts, who said traders remained in a negative mood, predicted the market would turn downward within the next few days.
The Dow Jones industrial average rose 4.96 to 2,624.10 after falling more than 26 points earlier in the session.
The broader market lagged the industrials. Declining issues outnumbered advancers by a margin of about 5-to-4 in nationwide trading of New York Stock Exchange-listed stocks. Volume on the floor of the exchange came to 144.44-million shares, up from 118.39-million in the previous session.
Government bond prices rose Tuesday as concern about Drexel's financial woes dominated trading activity and helped boost U.S. Treasuries.
The key 30-year bond rose 17-32 point, or about $5.30 for every $1,000 in face value. Its yield, which falls when the price rises, sank to 8.38 percent from 8.43 percent late Monday.
In the junk bond market, mutual funds said there was no immediate rush by investors to sell.
"We expected an above-normal reaction and there were more calls than usual for redemptions, but by and large investors have taken it in stride," said Steve Norwitz, spokesman for T. Rowe Price Associates Inc. in Baltimore, which manages a $700-million junk bond fund.
Market observers nevertheless predicted Drexel's troubles could be damaging for market psychology, at least in the short term. Drexel pioneered the junk bond market.
"Quite frankly, their very serious problems are likely to add to the skepticism with which investors currently view junk bonds," said John Lonski, senior economist with Moody's Investors Service.