Equities ended sharply higher today after a roller-coaster ride that snapped a five-session losing streak on talk that major U.S. banks have agreed to support troubled bond insurers while the Federal Reserve will help with another substantial rate cut when policy-makers convene next week.
There was a news report that banks had agreed to provide capital to bond insurers, said Bill McGowan, managing director at Interactive Brokers. Major municipal bond insurers and MBIA Inc and Ambac Financial Group have been weakened by their exposure to billions in subprime-based investments they also guaranteed.
After falling to a low of 11,644.81 early today, the Dow bounced back more than 600 points to close at 12,270.17, up 298.98, or 2.5%. The S&P 500 rose 28.10, or 2.14%, ending at 1,338.60; and the Nasdaq composite closed up 24.14, or 1.05%, at 2,316.41. All numbers are preliminary.
Analysts expect Fed officials to cut the fed funds rate by another half-point to 3% when they meet Jan. 29-30, after they lowered the benchmark rate by three-quarters of a point to 3.5% on Tuesday to stem a global equity markets slide.
Fed funds futures trading in Chicago showed 100% odds of a 50 basis-point cut in the overnight interbank lending rate, as well as a 48% chance of another 75 basis-point cut to 2.75%, which would bring the benchmark to its lowest level since March 2005.
Meanwhile, the 30-year Treasury bond fell to 4.101% in early trading, its lowest level since the U.S. government started issuing the long-term debt in 1977. The bond yield rose back to 4.125% in late afternoon trading.
Chip Hanlon, president of global money manager Delta Global Advisors said It has been an amazing rally for U.S. bonds since July, Mr. Hanlon said, referring to the 30-year bond yielding 5.04% before the summer market turmoil. But bonds now are less an indicator that inflation is under control and more a signal that the market expects a recession.
The Federal Open Market Committee, the rate-setting arm of the Fed, had already cut the fed funds rate to 4.25% from 5.25% between Sept. 18 and Dec. 11, 2007.