U.S. Stocks Rise on Optimism Over European Debt as Treasuries, Dollar Drop

Treasuries fell, sending two-year yields up from a record low, and the dollar weakened as stronger-than-forecast jobs growth eased concern the nation will slip into a recession. The Dow Jones Industrial Average swung in a 416-point range before closing up 0.5 percent.

Two-year note yields rose three basis points to 0.29 percent and the Dollar Index, a gauge of the currency against six major peers, lost 0.8 percent to 74.499 as of 4:51 p.m. in New York. The Dow ended with a gain of 60.93 points at 11,444.61 while the Standard & Poor’s 500 Index lost 0.1 percent to an eight-month low of 1,199.38. It slid 7.2 percent over five days, its worst weekly drop since November 2008.

Ten and 30-year Treasuries also declined, pushing yields up from their lowest levels of the year, after the government said the U.S. unemployment rate fell to 9.1 percent in July as the nation added 117,000 jobs. Stocks swung between gains and losses throughout the day as investors watched developments in Europe’s debt crisis and speculation grew that the American government’s credit rating will be cut.

“The bond market’s telling you things are better than people thought,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, said in a telephone interview today. “Overall it was a pretty good report," he said of the Labor Department’s jobs data. "It really shows the U.S. economy’s nowhere near a recession, so that’s all great news.”

Yields Increase

Ten-year Treasury yields surged 16 basis points to 2.57 percent, while rates on 30-year bonds increased 18 basis points to 3.85 percent. Both reached the lowest levels since last fall yesterday. Credit-default swaps protecting U.S. government debt for five years rose to 55.39 basis points from 54.88 yesterday, according to data provider CMA, still down from a two-year high of 64.37 on July 28.

Stocks slid to their lows of the day today amid speculation S&P was close to announcing a reduction in the U.S. AAA credit ranking. S&P spokesman John Piecuch said in an e-mail that the ratings company won’t comment on speculation about the U.S. rating. Moody’s Investors Service and Fitch Ratings this week affirmed their AAA U.S. ratings.

‘More Cautious’

“The fear of a downgrade will be with us for a while,” Bruce McCain, who helps oversee $22 billion as chief investment strategist at the private-banking unit of KeyCorp in Cleveland, said in a telephone interview. “It’s time to become more cautions, not defensive, but cautious.”

A global slump has erased more than $4.5 trillion from the value of equities worldwide since July 26. The S&P 500 erased its gain for 2011 this week and is now down about 4.6 percent for the year after slumping 11 percent since July 22 in its worst plunge since the bull market began in 2009.

Wall Street has never been more sure that stocks will rally in 2011, even as lower-than-estimated data on manufacturing and service industries fueled concern that the nation will slip back into a recession. Chief strategists at 13 banks from Barclays Plc to UBS AG see the S&P 500 surging 17 percent through Dec. 31, according to the average estimate in a Bloomberg survey. Their projection that the index will reach 1,401 hasn’t budged in four weeks.

In today’s trading, Bank of America Corp. dropped 7.5 percent and Citigroup Inc. slumped 3.9 percent as Europe’s debt crisis and losses linked to souring home loans threatened to undermine industry earnings. Consumer-staples companies, health- care providers and utilities in the S&P 500, among groups least- tied to the economy, rose at least 0.8 percent.

Europe Debt Watch

The S&P 500 surged as much as 1.5 percent in the first five minutes of trading, then the index erased its gain in less than 20 minutes. Stocks recovered from session lows after Reuters said the ECB is pressuring Italy to make reforms in exchange for purchasing the nation’s bonds.

Prime Minister Silvio Berlusconi, seeking to prevent Italy from becoming the next victim of Europe’s debt crisis, vowed to balance the budget and impose austerity faster than planned. The moves may pave the way for the ECB to lower the nation’s borrowing costs by buying its bonds in secondary markets. The ECB yesterday said it would renew its bond-buying program, and council member Luc Coene said today the lender was ready to act as soon as governments “take steps.”

While yields on Italian and Spanish debt fell today, borrowing costs have surged since a July 21 European Union summit approved a new aid plan for Greece and measures to aid other euro-region countries before they need a bailout.

Italian, Spanish Debt

Italian 10-year bond yields are up 76 basis points since the summit, while Spanish yields have gained 33 basis points. The difference between the yield on 10-year Italian bonds and similar German securities reached 416 basis points today, a record since the adoption of the single currency. The spread ended the trading day at 374 basis points.

“If we are able to get policy makers working together like we did coming out of recession, the market is likely to respond better," Eric Teal, chief investment officer at First Citizens Bancshares Inc. in Raleigh, North Carolina, said in a telephone interview. His firm manages $4 billion. ‘‘We’re nearing some capitulation levels here. We’re in that transition process.”

European equities erased losses after the U.S. jobs data, only to resume declines as concern about the American debt rating spread. The Stoxx Europe 600 Index sank as much as 3.3 percent before closing 1.8 percent lower.

Royal Bank of Scotland Group Plc tumbled 6.9 percent after posting a wider-than-expected first-half loss. Allianz SE, Europe’s biggest insurer, lost 4.5 percent after reporting second-quarter net income that missed analysts’ estimates.

Worst Week Since ‘08

The Stoxx 600 sank 9.9 percent over the past five days in its worst weekly plunge since November 2008.

The MSCI Emerging Markets Index fell 3 percent today after joining the S&P 500 in entering a so-called correction yesterday, falling more than 10 percent from this year’s high. Benchmark indexes in Russia, China and Turkey fell at least 2 percent today.

The S&P GSCI Index of 24 commodities rose 0.1 percent today after climbing more than 1 percent and sliding 2.6 percent during the day. Gold fell for the second straight day, with December futures dropping 0.4 percent to $1,651.80 an ounce, as some investors sold to cover losses in other markets. Silver slumped, capping the biggest weekly drop in three months.

Oil rose for the first time in six days in New York and curbed the biggest weekly plunge in three months. Crude gained 0.3 percent to $86.88 a barrel and tumbled 9.2 percent this week.

To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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