Dow Climbs 416.66 for Its Biggest Gain in Over 5 Years

Dow Climbs 416.66 for Its Biggest Gain in Over 5 Years

New York Times

Stocks had their biggest one-day gain in five years Tuesday after the Federal Reserve announced that it would step up its lending to ease strain on the dysfunctional money market.

But the reaction was far more muted in the troubled credit market, which the Fed was trying to help. Investors who specialize in mortgage securities and high-yield bonds appeared unconvinced that the measures would quickly or fully cure the ills plaguing the markets.

"For today, yes, it's better," said Max Bublitz, chief strategist at SCM Advisors, an investment firm in San Francisco. But "I don't think you are going to take five years' worth of credit expansion and fix it in four, five months."

The Fed has steadily escalated its intervention in the financial markets because its usual policy tools — short-term interest rates and operations in the money market — have done little to restore the confidence and lending capacity of banks and investors. In its latest move, the central bank will offer to lend Treasury securities for 28 days to financial firms that pledge a range of other securities, including bonds backed by risky mortgages.

The news was a breath of fresh air for stocks, helping major indexes snap a three-session losing streak. The Standard & Poor's 500-stock index closed up 47.28 points, or 3.7 percent, to 1,320.65. The Dow Jones industrial average finished up 416.66 points, or 3.6 percent, to 12,156.81. The Nasdaq was up nearly 4 percent. Major markets in Europe all rose at least 1 percent Tuesday, and Asian stocks joined in Wednesday morning, rising the most in a month in early trading.

Financial firms in the S.& P. index were up 7.4 percent, their best day in about eight years. Washington Mutual, the mortgage lender, jumped 18 percent on speculation that big investors would put money into it.

"No doubt there's a relief," said James W. Paulsen, a strategist at Wells Capital Management in Minneapolis. "For us bulls that had been getting run over, it's nice to have a day like this."

The dollar gained back some of the ground it had been losing against currencies like the Japanese yen.

In the credit markets, there was less ebullience but still some improvement. The premium that investors demand to hold bonds issued by Fannie Mae and Freddie Mac, the government-chartered mortgage buyers, fell noticeably though it was still about twice its level of a year ago. Debt issued by banks and other financial players were also trading at higher levels, specialists said.

Treasuries, which had been bid up in recent weeks as investors sought safe havens, fell for the first time in three sessions. The yield on the 10-year note, which moves in the opposite direction from its price, rose to 3.594 percent, from 3.457 percent.

But prices in other investments like loans continued to slide as companies and banks still had trouble selling debt, according to Standard & Poor's Leveraged Commentary and Data. The high-yield bond market was essentially flat, according to KDP Investment Advisor, a bond research firm.

"Credit market participants are rightfully cautious," said David Kovacs, an investment strategist at Turner Investment Partners in Berywn, Pa. "There's no guarantee and no assurance that our credit woes are over. This is, however, an important first step."

The Fed's latest effort to address the credit problems will not directly address losses in the credit markets. It also will not on its own reduce the cost of borrowing for banks, consumers or businesses. Analysts say the Fed is allowing securities dealers to borrow against bonds that cannot be easily traded or that can only be sold at a loss. The Fed hopes to give financial firms flexibility and thus ease the flow of money. With Tuesday's changes, $1 trillion in securities that previously did not previously qualify as collateral will be eligible to be pledged to the central bank.

"The goal is to 'improve market function,' " David Greenlaw, an economist at Morgan Stanley, said in a note to clients, quoting Fed officials who talked to dealers in a conference call. "According to the Fed, there have been a number of recent signs pointing to some deterioration in the market's ability to function properly."

The Fed has tried to achieve the same goals in a number of ways since August. It has been running periodic auctions where it agrees to lend up to $30 billion to financial firms for 28 days. Last week, it said it would increase the size of those auctions to $100 billion. The Fed has also cut its short-term interbank lending rate to 3 percent, from 5.25 percent, and policy makers are expected to reduce it again next week.

The stock and credit markets have often reacted differently to the Fed's efforts, a signal to some specialists that the markets remain unnerved. Financial markets do not always move in step with each other but over longer periods they tend to converge.

"If you look at the various indicators of risk, they are not in agreement" today, said Joseph Mezrich, head of quantitative research at Nomura Securities in New York. "That's important. We are probably not out of the woods till they all converge."