The Federal Reserve’s decision to buy $1 trillion of government debt and mortgage-backed securities jolted Wall Street on Wednesday. Within moments of the announcement, stocks and Treasury prices soared while the value of the dollar tumbled.
With financial companies leading the markets higher, the Dow Jones industrial average rose to its highest levels in about a month and the broader Standard & Poor’s 500-stock index gained 2.1 percent to end just shy of 800 points. Investors applauded the move and said the Fed’s decision to essentially print money could help to lower borrowing costs and allow more people to refinance mortgages.
In all, the Fed announced it would buy $750 billion in mortgage-backed securities and $300 billion in longer-term Treasuries in a push to loosen credit markets and restart lending, which froze as the financial crisis erupted in the fall. The central bank said it would “employ all available tools to promote economic recovery and to preserve price stability.”
The price of long-term Treasuries surged higher, and the yield on the benchmark 10-year note posted its biggest one-day drop in years, falling to 2.53 percent, from 3.01 percent late Tuesday. Yields fell on 30-year bonds as well as 2- and 5-year notes.
The price on the 10-year note, which moves in the opposite direction from the yield, rose 4 2/32, to 101 28/32.
Although some economists warned that the huge debt purchases could lead to rampant inflation down the road, others hailed the Fed’s move as an aggressive and significant step to address the deepening downturn.
“This big buyback is concrete and real,” said Owen Fitzpatrick, head of equity trading at Deutsche Bank Private Wealth Management.
Government bond prices surged last autumn as the spreading financial crisis pushed investors toward the safe haven of government debt, but Treasuries have fallen back as investors anticipate vast amounts of new government spending.
“It inspired a feeding frenzy,” said Martin Mitchell, head of government trading at Stifel Nicolaus. “They caught the market off guard.” In one move that did line up with expectations, the Fed held its target interest rates steady at nearly zero percent, a record low.
Shares of Sun Microsystems, which makes the Java software that runs many Internet applications, were up 78.9 percent after reports that it was in talks to be acquired by I.B.M. Shares of Sun ended at $8.89. I.B.M. was down 1 percent, to $91.95.
In stock markets, the Dow extended gains from Tuesday to end up 90.88 points, or 1.2 percent, to 7,486.58. The S.& P. 500 was up 16.23 points, to 794.35. The technology-heavy Nasdaq rose 2 percent, to 1,491.22.
After two months of grinding losses that dragged markets to their lowest levels in some 12 years, stocks have rebounded broadly over the last week. Major banks whose share prices had dropped 90 percent amid concerns over their solvency have led the way higher.
On Wednesday, shares of Citigroup gained 22.7 percent to close at $3.08 — roughly three times their low of $1.02 on March 5. Bank of America gained 22 percent to end at $7.67, and Goldman Sachs ended above $100 a share for the first time since late October. But the prospect of billions and billions of newly printed American dollars sent the value of the currency falling against the yen and the euro. The dollar index dropped 3.3 percent, and the euro rose to $1.34, from $1.30 late Tuesday.
Crude oil settled at $48.14 a barrel, down $1.02.
Following are the results of Wednesday’s Treasury auction of 56-day cash management bills:
