Stocks Rally, 10-Year Yield Hits Record Low After Fed Statement

U.S. stocks jumped the most in more than two years, rebounding from the worst drop since 2008, and 10-year Treasury yields touched a record low as the Federal Reserve vowed to keep interest rates near zero through mid-2013. The dollar weakened and the Swiss franc rose the most since at least 1971.

The Standard & Poor’s 500 Index jumped 4.7 percent to 1,172.53 at 4 p.m. in New York, its biggest gain since March 2009, after tumbling 6.7 percent yesterday. The 10-year Treasury yield fell as much as 28 basis points to 2.03 percent before trimming its decline. The Dollar Index slid 1.2 percent, its biggest drop since October, while the Swiss franc strengthened as much as 6.5 percent to a record $1.4099.

In pledging to keep its benchmark rate at an all-time low, the Fed also discussed a range of policy tools to bolster the economy, saying it is prepared to use them “as appropriate.” The statement fueled speculation the central bank may consider a third round of quantitative easing through bond purchases to revive a recovery that’s “considerably slower” than anticipated.

“The Fed is clearly setting up a situation that could offer them the potential to do something significant, if necessary,” 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. “That could be viewed as a positive,” he said. “People are starting to realize that what we’ve had in the market was an overreaction.”

Rebound After Rout

U.S. stocks rebounded from a rout that wiped out $1 trillion yesterday in the first trading session after the government was stripped of its AAA rating at S&P. The S&P 500 sank 11 percent in the previous three days and started today trading at 12.3 times reported earnings, compared with its average of 16.4 since 1954, according to data compiled by Bloomberg.

The MSCI All-Country World Index rose 2.1 percent for its biggest gain of the year, rebounding from a drop of as much as 2 percent earlier today that threatened to extend declines from this year’s high in May to 20 percent or the threshold for a bear market. The index started the U.S. session valued at about 12.1 times profits, down from 21 in 1995..The MSCI Emerging Markets Index pared today’s drop to 2.2 percent after tumbling as much as 4.4 percent.

Dow Rallies

The Dow Jones Industrial Average rallied 429.92 points, or 4 percent, to 11,239.77 for the biggest percentage gain since the month the bull market began in March 2009. The Dow’s advance today was the 10th largest point-gain in the history of the index, according to Bespoke Investment Group LLC. All 30 stocks gained at least 0.8 percent.

Laszlo Birinyi, one of the first investors to recommend buying when the bull market began in 2009, said the Standard & Poor’s 500 Index will continue its ascent, though possibly not to the level he had predicted.

“The bull market is intact, and while our ‘target’ of 1,450 in mid-2012 is admittedly a bit shaky, our more important conclusion that a rational, disciplined portfolio can attain a 10 percent plus return in 2011 is not,” Birinyi, of Westport, Connecticut-based research firm Birinyi Associates Inc., wrote in a note today.

Financial Shares

Financial shares in the S&P 500 led today’s advance, surging more than 8.2 percent as a group for the biggest rally since May 2009 and recovering from yesterday’s two-year low. Bank of America Corp. surged 17 percent and Hartford Financial Services Group Inc. climbed 16 percent to lead gains among 80 of 81 banks, insurers and investment firms in the index.

The Fed’s statement represents the biggest effort since November to spark the U.S. economy and revive confidence while stopping short of initiating a third round of large-scale asset purchases. Chairman Ben S. Bernanke and his colleagues acted after reports showed the economy was slowing and an unprecedented downgrade to the U.S. credit rating sent stocks tumbling from Sydney to New York. Three members of the policy committee dissented, preferring to maintain the pledge to keep rates low for an “extended period” without a specific timeframe.

The central bank’s plan to keep the federal funds rate in its range of zero to 0.25 percent for two more years is a “major policy change,” according to Augustine Faucher, director of macroeconomics at Moody’s Analytics in West Chester, Pa.

Fed ‘Is Concerned’

“By providing a more explicit time line for raising rates, the Fed is telling markets it is concerned about recent economic weakness and the potential for a near-term contraction, and is dedicated to spurring stronger economic growth," Faucher wrote in a note.

MEMC Electronic Materials Inc. climbed 19 percent for the biggest increase in the S&P 500. Four executives, including Chief Executive Officer Ahmad Chatila, bought a combined 87,500 shares of the second-largest U.S. manufacturer of polysilicon on Aug. 5, according to regulatory filings.

Treasury note and bond yields plunged after the Fed’s statement was issued at 2:18 p.m. New York time, before paring the declines later in the afternoon.

Two-year Treasury yields also touched a record low, dropping as much as 10 basis points to 0.16 percent before trading at 0.20 percent. Thirty-year rates were little changed at 3.65 percent. The Treasury’s sale of $32 billion in three-year notes drew stronger-than-average demand in the first note sale since the U.S. debt rating was cut.

Moody’s, Fitch

Moody’s Investors Service reiterated yesterday that it affirmed the U.S. government’s top Aaa ranking because the dollar’s status as the main reserve currency allows it to support higher debt levels than other countries. Fitch Ratings affirmed its AAA grade for the U.S. last week. The U.S. AA+ rating at S&P is still higher than Japan or China.

European shares recovered from early losses amid speculation that the Fed would bolster investor confidence. The Stoxx Europe 600 Index snapped a seven-day slump and rebounded from a two-year low, climbing 1.4 percent after plunging 5.1 percent in early trading. Basic-resource stocks rebounded from an 11-day slide, led by gains at Antofagasta Plc. Thomas Cook Group Plc, Europe’s second-largest tour operator, surged 17 percent. RWE AG, Germany’s second-biggest power company, led utilities lower after profit fell.

Italian Bonds

The yield on Italy’s 10-year note fell 11 basis points to 5.18 percent, after dropping 81 basis points yesterday. The extra yield investors demand to hold Italian 10-year securities instead of benchmark German bunds dropped 21 basis points to 281 basis points today, the least since July 22. The European Central Bank bought Italian and Spanish bonds for a second day, people familiar with the transactions said. Spain’s 10-year yield fell eight basis points to 5.08 percent today, extending yesterday’s slide.

Four years after BNP Paribas SA marked the start of a financial crisis by freezing withdrawals from investment funds because it wasn’t able to value subprime mortgage bonds, a reduction of the U.S. debt rating and escalating sovereign woes in Europe show credit markets are still fragile. The Markit iTraxx Crossover Index of credit-default swaps on mostly junk-rated European companies increased for an eighth day, adding 18 basis points to a mid-price of 592 today.

The S&P GSCI index of 24 commodities lost 1 percent. Oil lost 2.5 to $79.30 a barrel, the lowest level since September. Gold futures pared gains after adding as much as 4.1 percent to a record $1,782.50 an ounce.

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