The Fed Throws in the Towel and Stocks Soar

The Dow soared 429.92 points on Tuesday which came after Monday’s 634.76-point bloodbath. The S&P 500 jumped 4.74% yesterday which brings the loss for the week to 2.24%

Yesterday was an unusually frantic day of trading. At the time of the Fed’s announcement, the market was modestly higher. Once the FOMC news was digested, the market tanked hard.

By 2:45 pm, the S&P 500 hit 1,101.54 which was the lowest point in nearly a year. The market then suddenly put on a furious rally. From the intra-day low to the close, the market added 6.44%. Yowza. That ain’t bad for 75 minutes’ work.

I’m not saying that the panic has passed, but I will note that the $VIX took a big tumble on Tuesday. That’s to be expected with a rally. The $VIX dropped 12.94 yesterday to close at 35.06. Once again, most of the decline came towards the end of the trading day.

I mentioned earlier that Tuesday was a classic “snapback” rally. In other words, what did the worst on Monday did the best on Tuesday. What did the best on Monday did the worst yesterday. As a result, the Morgan Stanley Cyclical Index (^CYC) finally outpaced the market. Before today, the CYC trailed the S&P for 17 out of the last 18 days.

Once again, the big action was in the bond market. Stocks go down and bonds go up. Then stocks go up and bonds…still go up.

The yield on the 10-year Treasury reached an absurd all-time low of 2.0346%. Yes, that’s an all-time low. On July 1st, the 10-year yielded 3.2%. The yield on the two-year Treasury dropped as low as 0.157% yesterday. The yield on the 10-year TIPs dropped into the minus camp for the first time ever.

Here’s a look at the dramatic change in the yield curve between July 25th and yesterday:

There’s now very little difference between the two-year and three-year Treasury yield. That’s a direct result of the Fed’s announcement. The market doesn’t expect the Fed to raise interest rates for at least a few more years.

Here’s a stat for you that shows you how much times have changed. Two years ago, a two-year Treasury yielded 1.32% and a three-year yielded 1.87%. That implied that the one-year yield would be at 2.97% in two years, meaning today.

Instead of yielding 2.97%, the one-year currently yields 0.11%.

Posted by on August 10th, 2011 at 8:30 am


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