Bloomberg News

Stocks Drop as Treasuries, Dollar Gain on Fed’s Plan to ‘Twist’

September 21, 2011

Sept. 21 (Bloomberg) -- U.S. stocks slid, while Treasuries and the dollar rallied, after the Federal Reserve announced plans to buy $400 billion of long-term debt in an effort to combat “significant downside risks” to the economy.

The Standard & Poor’s 500 Index tumbled the most in a month, losing 2.9 percent to 1,166.76 at the 4 p.m. close in New York and extending a three-day drop to 4.1 percent. Ten- year Treasury yields dropped to a record low and 30-year bond rates slid to the lowest since January 2009, while two-year yields rose. The Dollar Index climbed 1 percent to a seven- month high of 77.802. Lead, nickel and sugar fell more than 3 percent to lead the S&P GSCI Index to a one-month low.

Financial shares in the S&P 500 led losses and sank to a two-year low after Moody’s Investors Service cut credit ratings on three banks and the Fed said “strains in global financial markets” were among risks to the economic outlook. The Fed will replace some shorter-term debt in its portfolio with longer-term Treasuries in an effort to further reduce borrowing costs and keep the economy from relapsing into a recession, confirming market speculation that policy makers were planning an “Operation Twist” similar to a program in 1961.

“Markets took note of the Fed’s downward revision of the economic outlook and upgrading of downside financial risks,” Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co. in Newport Beach, California, wrote in an e-mail. Pimco is the world’s largest bond-fund manager. “While Fed purchases can influence Treasury and mortgage valuations, it is limited in its ability to deliver economic outcomes.”

Fed’s Plan

The central bank will buy $400 billion of bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less. The Fed’s plan to replace short-term Treasuries in its $1.65 trillion portfolio with long-term debt will probably fail to lower the 9.1 percent unemployment rate, according to 61 percent of economists surveyed by Bloomberg before the announcement. The Fed also said today it will reinvest maturing housing debt into mortgage-backed securities instead of Treasuries.

“The mortgage story is the most important part,” said William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts. “This goes right to the source. This will create a wave of refinancings on the mortgage side.”

GOP Opposition

Republican lawmakers urged Chairman Ben S. Bernanke to refrain from additional monetary easing to avoid “further harm” to the U.S. economy, saying Americans have reason to be “skeptical” of his plans. Senator Charles Schumer, a Democrat from New York, in a statement yesterday said the move was “a heavy-handed attempt to meddle in the Fed’s independent stewardship of monetary policy” and should be ignored.

Ten-year Treasury yields sank as much as nine basis points to 1.8525 and 30-year rates slid 19 basis points, or 0.2 percentage point, to 3.01 percent. Two-year yields climbed four basis points to 0.20 percent.

All 10 of the main industry groups in the S&P 500 retreated at least 1.3 percent, led by a 4.9 percent plunge in financial shares. The Dow Jones Industrial Average sank 283.82 points, or 2.5 percent, to 11,124.84

“The markets apparently were hoping for a large, magic vitamin C pill for an anemic economy that feels like it’s catching the flu,” Barton Biggs, managing partner and co- founder of hedge fund Traxis Partners LP in New York, said in an e-mail.

Financials Plunge

The S&P 500 Financials Index fell to the lowest level since July 2009. Bank of America Corp. tumbled 7.5 percent after Moody’s Investors Service downgraded the bank’s long-term debt rating. Wells Fargo & Co. also had its long-term rating cut, wiping out an earlier gain and dragging the stock down 3.9 percent. Citigroup Inc. fell 5.2 percent as Moody’s cut its short-term debt rating. Goldman Sachs Group Inc. closed below $100 for the first time since March 2009.

Costs to protect debt from Bank of America, Citigroup and Wells Fargo rose after the downgrades by Moody’s, which said U.S. support is less likely in an emergency. Credit-default swaps tied to Bank of America added about 40 basis points from yesterday to 375 basis points as of 3:41 p.m. in New York, according to broker Phoenix Partners Group. Swaps on Wells Fargo jumped to the highest since July 2009, climbing 17 basis points to 143 basis points, Phoenix prices show. Contracts on Citigroup rose 19 to 250, according to data provider CMA.

Coal and Train Stocks

Commodity producers in the S&P 500 sank 4.5 percent as a group for the second-biggest slide after financial shares. Alpha Natural Resources Inc. and Walter Energy Inc., two U.S. producers of coal used in steelmaking, tumbled at least 12 percent after they cut output and sales forecasts respectively. Railroad companies slumped following the forecasts, with CSX Corp. and Norfolk Southern Corp. sliding more than 8 percent.

Technology stocks fell the least among 10 groups. Oracle Corp. climbed 4.2 percent after the software maker reported profit that topped analysts’ estimates following increased spending on database programs and applications that help run businesses. Hewlett-Packard Co. rallied 6.7 percent after two people familiar with the matter said the company’s board plans to consider ousting Leo Apotheker as chief executive officer.

U.S. equities briefly turned higher this morning after sales of existing homes increased more than forecast. Purchases of existing houses, which are tabulated when a contract closes, increased 7.7 percent to a five-month high 5.03 million annual rate, figures from the National Association of Realtors showed. The median forecast of economists surveyed by Bloomberg News called for a 4.75 million rate.

European Stocks

The Stoxx Europe 600 Index lost 1.7 percent with about three shares declining for each that gained in the regional benchmark. Automakers and basic-resource companies were the biggest drag on the index, as PSA Peugeot Citroen and Daimler AG lost more than 3.7 percent. Deutsche Lufthansa AG sank 5 percent as Europe’s second-largest airline said it expects fuel expenses to climb and Deutsche Bank AG downgraded the shares.

European banks slipped 1.6 percent as a group. The government debt crisis has generated as much as 300 billion euros ($410 billion) in credit risk for the region’s banks, the International Monetary Fund said, calling for capital injections. Banks face “funding challenges” because of investor concern about their potential losses from government bonds, with some relying heavily on the European Central Bank for liquidity, it said.

Debt Risk Increasing

The European Systemic Risk Board, Europe’s risk watchdog, said threats to the financial system have increased “considerably” as the region’s sovereign debt crisis weakens economic growth and pressures banks. Intesa Sanpaolo SpA, Mediobanca SpA and two other Italian banks had their credit ratings lowered by S&P after the company downgraded Italy’s government debt on Sept. 19 for the first time in five years.

Greek 10-year bond yields surged 31 basis points to 23.55 percent and Italian and Spanish yields also increased. International inspectors will return to Athens next week to discuss Greece’s prospects for more financial aid after Greek Finance Minister Evangelos Venizelos made “good progress” in talks about with the European Union and the IMF yesterday, according to the EU. Greek Prime Minister George Papandreou’s government said it will accelerate budget cuts, targeting civil servants’ wages and pensioners to keep emergency loans flowing and avoid default.

Pound Weakens

The pound weakened 1.5 percent to $1.5505 and the U.K.’s FTSE-100 Index of stocks lost 1.4 percent after Bank of England officials said they may need to buy more bonds to bolster to boost the U.K. economy. Most policy makers said it was “increasingly probable that further asset purchases to loosen monetary conditions would become warranted at some point,” the minutes of the Monetary Policy Committee’s Sept. 7-8 meeting showed.

The MSCI Emerging Markets Index fell 1.2 percent to the lowest closing level since July 2010. Russia’s Micex Index retreated 0.8 percent and the ruble declined for a ninth day against the central bank’s target dollar-euro basket, headed for its longest stretch of declines since February 2009. The Shanghai Composite Index jumped 2.7 percent after the Conference Board said its leading indicator index rose in July.

Oil lost 1.2 percent to $85.92 a barrel, erasing earlier gains which were triggered by a U.S. Department of Energy report that crude inventories fell by 7.34 million barrels to an eight- month low of 339 million last week. Among 24 commodities tracked by the S&P GSCI Index, only lean hogs advanced.

--With assistance from Claudia Carpenter, Andrew Rummer, Daniel Tilles, Jason Webb and Stephen Kirkland in London, Shiyin Chen in Singapore, Jimi Corpuz, Cordell Eddings, Susanne Walker, Shannon D. Harrington and Sapna Maheshwari in New York and Scott Lanman in Washington. Editors: Michael P. Regan, Jeff Sutherland

To contact the reporters on this story: Michael P. Regan in New York at; Rita Nazareth in New York at

To contact the editor responsible for this story: Nick Baker at

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