The Drudge Report headline says it all-it was a Bipolar Tuesday on Wall Street. The Dow swung in a 640-point range during the session to finish up 429.
Usually swings like this are caused by government intervention and today was no exception as The U.S. Federal Reserve signaled it plans to keep its benchmark short-term interest rate close to zero for at least another two years as it sharply downgraded its view of the U.S. economy.
The Two-Year Treasury Note fell to a record low yield of 0.177% today.
Here are the top financial stories of the day:
1) Wall Street roars back in wild trade after Fed meet-From Reuters
Stocks rallied on Tuesday in a volatile session as investors struggled to decipher the Fed's signals on the economy after a dizzying two-week slide.
Buying accelerated into the close and the S&P 500 posted its best day in more than two years, following a drop of nearly 17 percent over the past weeks.
The market reversed direction six times after a Fed statement that pledged two more years of near-zero interest rates.
Bank shares roared back from recent losses with the KBW capital markets index up 6.7 percent.
"The last three or four weeks, the stock market has really discounted a mild recession," said Mohannad Aama, managing director at Beam Capital Management LLC in New York.
"Now after the Fed announcement, the market has to start factoring in what the response from the Fed and the government will be. There is still a small chance for a fiscal stimulus aimed at job creation. The FOMC statement today was positive for equities."
The Dow Jones industrial average gained 429.92 points, or 3.98 percent, to end at 11,239.77. The Standard & Poor's 500 Index rose 53.07 points, or 4.74 percent, to 1,172.53. The Nasdaq Composite Index added 124.83 points, or 5.29 percent, to 2,482.52.
About 16.4 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq -- more than twice the daily average so far this year of 7.75 billion.
Advancing stocks outnumbered declining ones on the NYSE by a ratio of almost 12 to 1, while on the Nasdaq, almost five stocks rose for every one that fell.
The three major U.S. stock indexes, though, are still in negative territory for the year, in spite of Tuesday's strong rally.
At its session low after the Fed statement, the S&P 500 came within a few points of entering a bear market -- or a 20 percent decline from its recent closing high set on April 29.
According to a Reuters poll, the United States faces one-in-four odds of slipping back into recession, though the economic outlook was seen as raising the likelihood of new Fed action.
Even some investors hoping for action from the Fed acknowledged the central bank's options appear to be limited because the current crisis is not liquidity-driven, as it was in 2008.
Equities suffered a massive drop on Monday, the first session since the United States lost its top-tier triple-A credit rating from Standard & Poor's. As a result of Monday's huge sell-off, the S&P 500 posted its worst one-day percentage loss since December 2008.
2) Fed Pledges Low Rates Through 2013-From The Wall Street Journal
The U.S. Federal Reserve signaled it plans to keep its benchmark short-term interest rate close to zero for at least another two years as it sharply downgraded its view of the U.S. economy.
In a statement after a one-day policy meeting, Fed officials said they expect the weak economy to warrant exceptionally low levels for the federal funds rate "at least through mid-2013." Seven voted in favor of this action, with three voting against.
Voting against the action were president from three regional Fed banks -- Richard Fisher of Dallas, Narayana Kocherlakota of Minneapolis and Charles Plosser of Philadelphia. The Fed statement said those officials "would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period."
While not the bold step to buy more bonds that some in the markets were hoping for, the move may help keep borrowing rates low and drive investors into riskier assets like stocks. The Dow Jones Industrial Average was up in volatile trade Tuesday, after suffering its biggest one-day decline since the 2008 crisis on Monday.
Fed officials Tuesday also downgraded their assessment of the U.S. economy for the third time this year, saying that economic growth so far this year has been "considerably slower than the Committee had expected."
Anxiety about a new economic downturn has increased recently, after data showed the economy grew by less than 1.0% in the first half and the U.S. saw its top-notch debt ratings downgraded for the first time. That has put pressure on the Fed to act, but its options are limited because short-term interest rates are already close to zero and the most powerful tool it has left -- buying more securities -- runs the risk of causing too much inflation.
Fed officials discussed a range of policy tools to boost the economy, the statement said. Some analysts were expecting the central bank to say it expects its balance sheet to remain large for an extended period as well, but there was no time frame put on its continuing Treasury purchases.
Since 2008, the central bank has been telling markets it wouldn't raise short-term rates for an "extended period," meaning at least several more months. Extending that for at least another two years may help lift the economy.
3) U.S. Two-Year Note Yield Falls to Record as Fed Extends Low Interest Rates-From Bloomberg
Treasury two-year notes rose, pushing yields to a record low, after Federal Reserve officials said economic growth is “considerably slower” and the Treasury’s sale of $32 billion in three-year notes drew stronger-than-average demand in the first note sale since Standard & Poor’s cut the U.S. debt rating Aug. 5.
Yields on 10-year notes erased gains as policy makers left their target interest rate in a range of zero to 0.25 percent and pledged to keep it there through mid-2013. The Federal Open Market Committee discussed a range of policy tools to bolster the economy and said it is “prepared to employ these tools as appropriate,” it said in a statement today in Washington. The notes drew a yield of 0.50 percent, a record low at auction.
The bid-to-cover ratio, a gauge of demand was 3.29, compared with an average of 3.15 for the past 10 sales.
“It’s pretty amazing that the Fed will be exceptionally low until 2013,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.
“They are telling you that we are in a stage of Japanese-like growth. The front end is rallying like crazy.”
Yields on two-year notes fell eight basis points, or 0.08 percentage point, to 0.18 percent at 2:34 p.m. in New York, according to Bloomberg Bond Trader prices. The 0.325 percent securities maturing in July 2013 rose 5/32, or $1.56 per $1,000 face amount, to 100 12/32.
Thirty-year bond yields rose six basis point to 3.71 percent. Benchmark 10-year yields fell two basis points to 2.30 percent.
Bid Pattern
The three-year note auction drew a yield of 0.50 percent, the lowest yield since records began in May 1981. It was less than the 0.523 percent average in a Bloomberg News survey of seven of the Fed’s primary dealers.
Indirect bidders, an investor class that includes foreign central banks, purchased 47.9 percent of the notes, the most since May 2010, compared with an average of 33.9 percent for the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 11.1 percent of the notes at the sale, compared with an average of 13.2 percent for the past 10 auctions.
At the July sale, the securities drew a yield of 0.67 percent.
The offering is the first of three note and bond auctions this week totaling $72 billion. The Treasury is scheduled to sell $24 billion in 10-year debt tomorrow and $16 billion of 30 year bonds on Aug. 11.
Market Surge
Treasuries surged yesterday as tumbling stock markets sparked demand for the safety of government debt. S&P cut the U.S. government’s AAA credit rating at the end of last week, while Moody’s Investors Service and Fitch Ratings have affirmed the U.S. at the top rating.
Volatility in the Treasury market has picked up. Merrill Lynch & Co.’s MOVE index, which measure price swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, rose yesterday to 117.8, the highest since Dec. 17, up from a 2011 low of 71.5 in May.
The 10-year note yields dropped earlier today to 2.27 percent, the lowest level since January 2009. The extra yield investors get for holding 30-year bonds instead of two-year notes was 3.41 percentage points, almost the narrowest on a closing basis since October 2010.
Treasuries have returned 6.2 percent this year, according to indexes complied by Bloomberg and the European Federation of Financial Analysts Societies. Japan’s government bonds have gained 1.3 percent, while German bunds have returned 4.8 percent, the indexes show.
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