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Wall Street gives up some gains ahead of Fed news

March 19, 2009|ASSOCIATED PRESS

NEW YORK — The Federal Reserve kept Wall Street's rally alive -- and gave the Treasury market a huge boost as well.

Stocks surged Wednesday after the Fed said it would pump more than $1 trillion into the economy to help revive it, in particular the housing market.

The plan includes buying as much as $300 billion of long-term government bonds over the next six months.

The Fed also said it would buy an additional $750 billion of mortgage bonds guaranteed by Fannie Mae and Freddie Mac, bringing its total purchases of those securities to $1.25 trillion. The central bank also is keeping its benchmark short-term interest rate at practically zero.

By driving down yields on Treasuries and mortgage-backed bonds, the move is designed to lower borrowing costs on home loans and other kinds of credit.

The Dow Jones industrial average reversed early losses to end up 91 points and the yield on the benchmark 10-year Treasury note plunged, indicating strong demand.

But the dollar fell as investors worried the government's actions would ignite inflation.

The Fed's move, analysts said, could produce an immediate drop in mortgage rates of 0.25 to 0.5 of a percentage point.

That's great news for borrowers who have good incomes and healthy credit scores. But significantly tighter lending standards have made it tough for many borrowers to qualify.

Nonetheless, stocks of home builders and financial firms shot higher on the news, which came a day after the Commerce Department reported better-than-expected housing start numbers for February.

The sheer magnitude of the Fed's proposal "indicates they have a lot of weapons still in the arsenal," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.

"They are certainly, assertively doing everything they can to intervene," said David Darst, chief investment strategist of Morgan Stanley's global wealth management group.

The Dow Jones industrial average gained 90.88 points, or 1.2%, to 7,486.58.

Broader stock indicators rose more sharply. The Standard & Poor's 500 index jumped 16.23 points, or 2.1%, to 794.35, and the Nasdaq composite index climbed 29.11 points, or 2%, to 1,491.22. The Russell 2,000 index of smaller companies soared 3.5%.

The indexes were trading lower before the Fed's announcement late in the session.

More than four stocks rose for every one that fell on the New York Stock Exchange. Volume was heavy.

Stocks have risen six out of the last seven days. Since the Dow and S&P hit 12-year lows last week, the Dow has rebounded 14%, and the S&P 500 has gained 17%.

Treasury yields tumbled. The benchmark 10-year note sank to 2.53% from 3% late Tuesday. The yield on the three-month T-bill, considered one of the safest investments, slipped to 0.21% from 0.23%.

Gold prices, which closed down $27.70 to $888.70 an ounce in New York, soared about $50 an ounce on the Fed news in electronic trading.

An index of financial stocks in the S&P 500 surged 10%. Citigroup gained 23%, Bank of America jumped 22% and Wells Fargo rose 17%.

An index of 15 home builders climbed 8.3%. Hovnanian Enterprises soared 50%, while Toll Bros. rose 5.7%. Home improvement retailers jumped as well. Home Depot rose 5.1%, and Lowe's added 4.7%.

Technology stocks rose on news that IBM was in discussions to buy Sun Microsystems for at least $6.5 billion in cash. Sun's shares skyrocketed 79%.

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