Bloomberg U.S. Stocks Gain, 10-Year Treasury Yields Fall Most Since 1962

March 18 (Bloomberg) -- U.S. stocks and Treasuries surged and the dollar tumbled after the Federal Reserve unexpectedly announced plans to buy $1 trillion of bonds in an effort to lower consumer borrowing costs and end the recession.

The Standard & Poor’s 500 Index added 2.1 percent, extending its rally since last week’s 12-year low to 17 percent. Yields on 10-year notes dropped the most since at least January 1962 after the central bank said it will spend $300 billion buying Treasury debt and up to another $750 billion on bonds backed by government-controlled mortgage companies. The dollar sank the most against the euro since September 2000.

“This is a huge step,” said Thomas Girard, who helps manage $115 billion in fixed-income securities with New York Life Investment Management in New York. “It’s a draw the line in the sand-type of event.”

Fed Chairman Ben S. Bernanke is trying to bolster housing and hasten the end of the 14-month U.S. recession. He stepped up efforts after unemployment increased to 8.1 percent and economists forecast the economy will shrink through the middle of the year. Fed officials also kept the benchmark interest rate at between zero and 0.25 percent to combat the “weak” short- term economic outlook, according to a statement today.

‘Big Positive’

“This is definitely a big positive,” said Noman Ali, a Toronto-based money manager at MFC Global Investment Management whose group manages $20 billion of U.S. equities. “This will bring down the risk premium and interest rates for corporate borrowers as well. That helps credit growth and hopefully helps turn the economy.”

‘Powerful Bullet’

“We thought it was a lower-probability event but we always knew that if the Fed did use this clearly powerful bullet it would cause a huge drop in yields,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., another primary dealer.

Yields on 10-year Treasury notes rose 33 basis points in the two days after the last policy meeting Jan. 28, when the Federal Open Market Committee said the central bank might buy longer-term Treasuries to revive lending but gave no further details. more...