U.S. Stocks, Oil Slide as Treasuries Erase Drop on Fed

U.S. stocks fell and Treasuries erased declines after the Federal Reserve said it will extend its program known as Operation Twist by $267 billion, disappointing investors speculating on a larger stimulus effort. Oil sank as the dollar gained.

The Standard & Poor’s 500 Index lost 0.4 percent to 1,352.41 at 12:53 p.m. in New York, retreating from the highest level since May 10. The 10-year Treasury yield was little changed at 1.62 percent after rising as much as six points earlier. The dollar strengthened against 13 of 16 major peers and oil plunged 3 percent to help lead commodities lower.

Prior stimulus efforts by the Fed, including two rounds of quantitative easing through asset purchases known on Wall Street as QE1 and QE2, helped the S&P 500 double from its bear-market bottom in 2009 while Treasury yields reached the lowest on record as demand for safety grew amid Europe’s debt crisis.

“The market was way too optimistic about getting QE3,” said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management. His firm oversees $160 billion. “People were throwing around numbers that were larger than what they announced for the extension of Operation Twist. It made no sense. It does seem like the Fed wants to keep some powder dry. They are doing the right thing.”

Operation Twist

The announcement from the Fed today comes as the original Operation Twist was set to expire this month. In Operation Twist, the central bank sells short-term securities and buys the same amount of longer-term debt to lengthen the average maturity of its holdings and keep borrowing costs low.

Ten-year yields have increased from their record of 1.4387 percent on June 1, the day the S&P 500 began a rebound after a 9.9 percent retreat from a four-year high on April 2. The stock index rallied after its valuation slid to 12.9 times its companies’ reported earnings, the cheapest since November.

A valuation measure showed U.S. 10-year notes have declined from the most expensive levels ever. The term premium, a model created by economists at the Fed, reached a record of negative 0.94 percent on June 1 as investors sought refuge from Europe’s sovereign-debt crisis.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average over the past decade is 0.50 percent.

To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net

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

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