Bloomberg News

U.S. Stocks Slide, 10-Year Note Rallies as Fed Plans ’Twist’

September 21, 2011

Sept. 21 (Bloomberg) -- U.S. stocks extended losses, and Treasuries rallied, after the Federal Reserve announced plans to buy $400 billion of long-term debt and said there are “significant downside risks” to the economic outlook.

The Standard & Poor’s 500 Index lost 0.7 percent to 1,193.34 at 2:25 p.m. in New York. The 10-year Treasury note yield dropped as much as seven basis points to a record low of 1.867 percent, while two-year yields climbed four basis points to 0.21 percent. The Dollar Index rose 0.1 percent.

Fed policy makers will replace some bonds in their 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 the central bank was planning an "Operation Twist" similar to one of the central bank’s program in the 1960s.

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 Federal Open Market Committee said today in Washington after a two-day meeting. The action is intended to “put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the FOMC said in a statement.

The S&P 500 rebounded 7.4 percent through yesterday after sinking to an 11-month low on Aug. 8. The index had tumbled as much as 18 percent from a three-year high at the end of April amid concern the economic recovery was weakening and speculation Europe’s worsening debt crisis would further threaten growth.

Fed Chairman Ben Bernanke said in an Aug. 26 speech that the central bank still has tools to stimulate the economy without signaling he will use them. He echoed comments of dissenting members of the Federal Open Market Committee who said then that U.S. economic data aren’t pointing to a recession.

Citigroup’s Economic Surprise Index for the U.S., which measures whether data exceed or trail economist forecasts, reached -117.2 on June 3, the lowest level since January 2009. The index has climbed back to -41 since.

--Editor:

To contact the editor responsible for this story: Michael P. Regan at mregan12@bloomberg.net


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