Bloomberg News

Treasuries Rally, Stocks Gain as Fed Pledges Low Rates Until ’14

January 26, 2012

Jan. 25 (Bloomberg) -- Treasuries rallied, sending five- year note yields to a record low, and stocks climbed as the Federal Reserve signaled plans to keep interest rates low through at least late 2014 and didn’t rule out purchasing more bonds to bolster growth. The dollar weakened.

Five-year yield Treasury yields sank as low as 0.76 percent. The Standard & Poor’s 500 Index added 0.9 percent to close at 1,326.06 at 4 p.m. New York time, returning to the highest level since July. The Nasdaq-100 Index jumped to an almost 11-year high as Apple Inc. surged to a record after profit doubled. The Dow Jones Industrial Average reached the highest level since May. The dollar slid against 14 of 16 major peers, while natural gas and silver led commodities higher.

The Fed extended its previous commitment to keep rates low at least until the middle of 2013 as more than two years of economic growth have failed to push the unemployment rate below 8.5 percent. Fed Chairman Ben S. Bernanke, speaking at a news conference after the statements, said that the option of further large-scale bond purchases is still “on the table.”

“This is a very dovish Fed,” David Kelly, who helps oversee $394 billion as chief market strategist for JPMorgan Funds in New York, said in a telephone interview. “It’s an attempt to push down long-term interest rates. They are pushing the rates down to a level where consumers should find them very attractive, but banks will find them very unattractive.”

Growth Forecast

The Fed also lowered its forecast for growth this year to 2.2 percent to 2.7 percent, down from a projection of 2.5 percent to 2.9 percent in November. It predicted the economy next year will expand between 2.8 percent to 3.2 percent, down from a previous forecast of 3.0 percent to 3.5 percent.

Yields on 10-year notes fell six basis points to 2.00 percent and the rate on the current five-year note ended down 10 basis points to 0.80 percent after touching its record low of 0.76 percent.

Stocks fell earlier as earnings or forecasts at companies from Xerox Corp. to Ericsson AB and Novartis AG disappointed investors, overshadowing record profit at Apple.

Technology companies rose 1 percent as a group and contributed the most to the S&P 500’s advance today. Apple surged as much as 8.1 percent to a record $454.45. It ended the day with a market value of more than $416 billion. First-quarter profit surged to $13.1 billion, or $13.87 a share, amid surging demand for the iPhone and iPad. Analysts surveyed by Bloomberg on average estimated profit of $10.14 a share.

Earnings Season

With its report yesterday, Apple single-handedly erased a drop in S&P 500 earnings for the December quarter, turning a 4.2 percent decline into a 4.4 percent gain. Apple’s 116 percent profit growth helped push its total cash to $97.6 billion -- enough to cover Greece’s debt payments due in the next two years, according to data compiled by Bloomberg.

Still, analysts forecast earnings increased 3.4 percent in the quarter, according to data compiled by Bloomberg, which would mark the slowest growth in more than two years.

“It’s going to be a mediocre earnings season,” Russ Koesterich, the San Francisco-based global chief investment strategist for the IShares unit of BlackRock Inc., said in a telephone interview. His firm oversees $3.5 trillion as the world’s largest asset manager. “We’re not going to see robust growth this year and this is being reflected in corporate outlooks. This is going to be a slow recovery.”

Textron, Xerox

Textron Inc. surged 15 percent after forecasting higher 2012 profit than analysts estimated, while Xerox Corp. slumped 9.9 percent after the provider of printers and business services gave earnings forecasts that trailed some analysts’ estimates as companies curb spending.

Illumina Inc. rallied 46 percent as Roche Holding AG offered about $5.7 billion in cash for the provider of genetic- analysis tools, the third time the Swiss drugmaker has made a hostile bid for a U.S. company since 2007.

The Stoxx Europe 600 Index fell for a second day, losing 0.4 percent. Ericsson tumbled 14 percent and Novartis, Europe’s biggest drugmaker by sales, sank 2.5 percent. ARM Holdings Plc, the U.K. owner of chip technology used in Apple’s iPhone and iPad, rose 3 percent.

The dollar weakened to the lowest level in a month against the euro, falling 0.5 percent to $1.3107 per euro, after gaining as much as 0.8 percent. The euro retreated earlier after the European Central Bank was said to oppose restructuring its Greek bonds. Australia’s dollar was the best performer, climbing 1 percent versus the U.S. currency, as stocks rallied.

European Yields

The Portuguese five-year note yield climbed to a record 18.93 percent, while the yield on the Italian 10-year bond jumped six basis points 6.2 percent.

The German 10-year bund yield slipped five basis points to 1.95 percent, falling for the first time in five days. Germany got bids for 5.042 billion euros ($6.6 billion) of 30-year bonds, more than the maximum sales target of 3 billion euros, the Bundesbank said in a statement today. The debt agency accepted bids for 2.458 billion euros at average yield of 2.62 percent.

The MSCI Emerging Markets Index added 0.2 percent. India’s Sensex index climbed 0.5 percent to a ten-week high amid speculation the central bank will add to yesterday’s bank reserve-requirement cut to stimulate economic growth.

--With assistance from Adam Haigh, Andrew Rummer, Daniel Tilles and Stephen Kirkland in London and Shiyin Chen in Singapore. Editors: Michael P. Regan, Jeff Sutherland

To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net; Jeff Sutherland in New York at jsutherlan13@bloomberg.net

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


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