Stocks Shrug Off Fed Rate Boost as Long-Term Yields Dive
Investors who thought markets couldn’t get more volatile were buffeted Thursday by another wild session in stocks--and by the biggest one-day rally in long-term Treasury bonds in more than two years.
One day after the Federal Reserve raised short-term interest rates for the fourth time since June, investors appeared to thumb their noses at the central bank. The Nasdaq composite index zoomed 137.02 points, or 3.4%, to 4,210.98, closing just under its recent record high.
The Dow Jones industrial average inched up just 10.24 points to 11,013.44, but that belied a strong advance in the broad market.
Yet the wildest action was in the Treasury bond market--so wild, in fact, that rumors swirled about trouble at large investment funds that may have been on the wrong side of the rallying market. Memories of the near-collapse of hedge fund Long-Term Capital Management in late summer 1998 resurfaced for many bond traders.
Investors were so anxious to get their hands on the benchmark 30-year T-bond that they bid the yield all the way down to 6.07% at one point, from 6.29% on Wednesday.
The bond’s yield ended the day at 6.14%--down 0.61 percentage point from its peak of 6.75% on Jan. 20, which was the highest in two years.
After rising early Thursday, yields on shorter-term Treasury securities also closed the day lower, despite the Fed’s boost Wednesday in its key short-term rate from 5.5% to 5.75%.
The two-year Treasury note yield fell to 6.53% from 6.60% on Thursday.
But the 30-year T-bond was the center of the action. Its yield fell so sharply that it spurred speculation that a large fund or bank suffered big losses because it had bet yields would move higher, not lower--a “short” sale, in market lingo. The talk was so rampant the Federal Reserve Bank of New York took the unusual step of saying it wasn’t holding an emergency meeting related to Treasury losses suffered by a financial firm.
“Even if those rumors aren’t facts, I’m sure a few banks, fund managers or hedge funds are in trouble” because of portfolio bets gone bad, said Joseph Pregiato, co-head of fixed-income sales at Josephthal & Co.
The bond market is being whipped by crosscurrents: While the Fed is trying to slow the economy by pushing short-term rates higher, long-term bond yields are plummeting because investors believe the securities will grow increasingly scarce as the Treasury, running huge surpluses, buys back long-term debt.
That divergence in interest rates could cause problems for the Fed. Although rates on mortgages and corporate bonds have fallen only slightly, if at all, in recent weeks, a further decline in those rates--if they begin to track long-term Treasury yields--could help boost the economy exactly at the point the Fed wants to slow it.
Today, the government will report on January employment trends. More signs of economic strength could raise expectations for additional short-term rate increases by the Fed.
The message from the stock market Thursday, however, was: So what!
Major technology and Internet stocks resumed their climb as investors showed little fear of what the Fed might ultimately do with interest rates.
“High-tech companies have such strong growth rates that they can continue to grow in a high interest rate environment,’ said John Davidson, chief investment officer of Orbitex Group of Funds, which oversees $10 billion.
Big gainers included Intel, up $4.19 to $104.19; Motorola, up $8.13 to $152.75; IBM, up $3.63 to $117.13; and Yahoo, up $32.25 to $360.25.
Tech’s surge left the Nasdaq composite only 0.6% below its record high of 4,235.40 set Jan. 21.
The Dow, by contrast, was held back by declines in such industrial names as Alcoa, down $2.31 to $72.25; Dupont, down $1.06 to $59.69; and Exxon Mobil, down $1.44 to $82.38.
Still, winners topped losers by nearly 2 to 1 on the New York Stock Exchange and by 25 to 15 on Nasdaq in heavy trading.
Besides tech, the telecom, food and biotech sectors were strong. Entertainment stocks also surged, on renewed merger rumors. Seagram gained $4.69 to $64.31 and News Corp. rose $2.44 to $54.31.
Although many market pros worry that a continuing rise in the stock market will only force the Fed to raise interest rates faster to slow the economy, some analysts put a positive spin on the day.
“Right now, we have a proactive Fed that is willing to gradually nudge up rates to slow down the economy but not break its back,” said John Shaughnessy, chief investment strategist with Advest Inc. Bullish investors, he said, are simply betting that the outcome is a continuing economic expansion.
Market Roundup, C5
