Stocks Rally on Weak GDP Data

The yield on the 10-year Treasury note, a benchmark for mortgages, slid below the psychologically important 5% level after the government said the economy expanded at a slower-than-expected 2.5% annualized pace in the second quarter.

The gross domestic product report provided a strong case for Fed policymakers to halt their 2-year-old credit-tightening campaign, many analysts said. That could mean that the Fed will take a pass at its next meeting Aug. 8.

Stocks rallied broadly on that possibility, with the Dow Jones industrial average climbing 119.27 points, or 1.1%, to 11,219.70, its highest since July 6.

The Nasdaq composite index jumped 39.67 points, or 1.9%, to 2,094.14.

The market's gains were relatively restrained compared with recent rallies. That suggested that some investors remain cautious about stocks, worried that the economy might slow too much.

Wall Street has fretted since mid-May that the Fed's efforts to quash inflationary pressures with higher interest rates could snuff out economic growth and hammer corporate earnings.

Money managers are split on whether the economy will turn fallow or achieve a so-called soft landing.

"There's a lot of confusion about whether times will be good or bad," said Robert Bissell, president of Wells Capital Management in Los Angeles.

For the Treasury bond market, good times would mean a weak economy that would open the door to Fed rate cuts down the road.

Investors jumped into bonds Friday on the expectation that interest rates might have peaked. The 10-year T-note yield ended at 4.99%, down from 5.04% on Thursday. The yield hit 5.24% on June 28, its highest since 2002.

"If bond traders can ever be happy, I suppose today was the day," said Sharon Lee Stark, fixed-income strategist at Stifel Nicolaus & Co. in Baltimore.

The yield on the two-year Treasury note dropped to 4.98% from 5.05% on Thursday. The yield now is the lowest since June 5 and is down from a peak of 5.28% on June 28.

Rising interest rates, combined with the volatile stock market, have driven many individual investors into money-market funds and other short-term accounts this year. The average annualized yield on money market funds is 4.78%, according to fund tracker ImoneyNet Inc.