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Bond yields plunge, stocks surge after Fed pledge on rates

August 9, 2011 | 12:22 pm

Investors poured into Treasury bonds once again Tuesday, sending interest rates plummeting, after the Federal Reserve surprised markets by saying it expected to keep short-term interest rates near zero for at least another two years.

The stock market initially seemed uncertain what to think of the Fed’s move. Share prices gyrated wildly after giving up most of their gains from early in the session.

But at 12:15 p.m. PDT, about one hour after the Fed issued its post-meeting statement, most stock indexes were higher. The Dow Jones industrial average was up 146 points, or 1.4%, to 10,956. Many broader market indexes posted bigger gains. The Nasdaq composite was up 2.1%.

The Fed triggered another tidal wave of money into Treasuries, driving yields down dramatically.
The two-year T-note yield plunged to a record low of 0.17% from 0.26% on Monday.

The 10-year T-note plummeted as low as 2.10%, down from 2.34% on Monday and nearing the record low of 2.06% reached in late 2008. The yield edged back to 2.18% at about 12:15 p.m. PDT.

In theory, if businesses and investors believe that short-term rates won't rise for at least two years, they would have more incentive to do something potentially more productive with their money than keep it in bank accounts earning nothing. That could include locking in higher yields on longer-term bonds.

That would allow big investors to borrow at cheap short-term rates and buy bonds, profiting from the spread between the cost of the loan and what they earn on the bonds.

-- Tom Petruno


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