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Bonds rally but stocks tumble after Fed unveils Operation Twist

September 21, 2011 |  2:07 pm

NYSE4-SpencerPlatt-Getty Images

Operation Twist was a pirouette for the bond market but a belly flop for the stock market.

The Federal Reserve’s announcement that it will shift some of its massive bond portfolio from shorter-term securities into longer-term securities sparked a furious rally in long-term Treasury bonds. But it led to a sharp selloff in stocks.

The Dow Jones industrial average sank 283.82 points, or 2.5%, to 11,124.84. The Standard & Poor’s 500 index lost 35.22 points, or 2.9%, to 1,166.76. It was the market’s biggest setback in a month.

Stock investors apparently doubted the Fed action will have a meaningful effect on the economy, and many were spooked by the central bank’s downbeat analysis of current conditions. The Fed said there were "significant downside risks to the economic outlook."

The reaction was happier in the bond market.

Though the announcement had been widely telegraphed, the $400-billion size of the Fed's shift from shorter-term Treasuries to longer-term bonds was larger than expected. That drove investors into longer-term Treasuries on the expectation that yields will fall further as the Fed buys those securities  over the next nine months.

Bond investors profit as yields on new bonds fall, increasing the value of older, higher-yielding securities.

The yield on the 30-year Treasury bond dropped to its lowest point since early 2009, falling to 3.01% from 3.20% on Tuesday.

The yield on the 10-year Treasury, a benchmark that influences mortgage rates, slid to a generational low of 1.86% from 1.94%.


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-- Walter Hamilton

Photo: The New York Stock Exchange. Credit: Getty Images