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Better economy, or worse? Today, both bets are winners

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This was one of those days on Wall Street when nearly everything worked -- if you’re a bull, anyway. Stocks rallied, so did most commodities, and Treasury bond yields tumbled.

So betting on a stronger economy via equities and raw materials paid off -- and so did betting on a weaker economy by locking in Treasury rates.

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Longer-term, one of those bets has to be wrong. But in the short run, with the end of the second quarter approaching, markets are vulnerable to odd crosscurrents as money managers position their books for clients’ viewing as of June 30.

The Dow Jones industrial average jumped 172.54 points, or 2.1%, to 8,472.40, its biggest one-day gain since June 1, boosted in part by some fresh optimism about corporate earnings.

Crude oil futures finished back above $70 a barrel, rising $1.56 to $70.23.

The biggest surprise was the Treasury market, where buyers poured in one day after the Federal Reserve disappointed investors by deciding against expanding its purchases of government securities and mortgage-backed bonds.

The Fed’s lack of action didn’t damp demand today at the Treasury’s auction of $27 billion in seven-year notes, which normally are a relatively tough sell with investors. The notes, the final part of a $104-billion T-note sale this week, sold at an annualized yield of 3.33%, which was below expectations. Bidding was heavy.

‘I’m shocked at the reception’ for the seven-year notes, said Tom Tucci, head of Treasury trading at RBC Capital Markets in New York. All three T-note auctions this week -- two-year, five-year and seven-year -- ‘were complete blowouts’ as investors stepped up, he said.

Are bond buyers figuring that the economy will take a turn for the worse in the second half? Are they trusting that inflation won’t rise, even if the economy rebounds?

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Whatever the motivation, investors are giving the Treasury every reason to be confident about its ability to proceed with its record borrowing binge.

Treasury yields plunged across the board today after the seven-year note auction. The 10-year T-note yield, a benchmark for mortgage rates, sank to 3.54%, down from 3.63% on Wednesday and the lowest since June 3. Buyers who jumped in when the 10-year T-note hit 4% two weeks ago are looking golden now.

Even if Treasury yields just hang around at current levels there should be some relief ahead for mortgage rates. The average 30-year loan rate was 5.42% this week, up from 5.38% last week, according to Freddie Mac.

-- Tom Petruno

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