As stock prices fell Wednesday after a 5 percent rally a day earlier, investors with an appetite for safety rushed to buy long-term government debt, The New York Times’s Jack Healy reported.
Investors piled onto the far end of the yield curve as they faced the prospect of zero-percent interest rates for the foreseeable future, pushing already low yields on 10- and 30-year Treasuries even lower. The price of government debt, considered the gold standard of safe investments, has boomed this year as the broader stock market has tumbled by more than a third.
“You’ve seen just a remarkable run-up in longer-dated Treasuries,” Chris Lafakis, an economist at Moody’s Economy.com, told The Times.
Stock markets, which soared Tuesday after the Federal Reserve cut its benchmark interest rate target to record lows of zero to 0.25 percent, closed lower as traders cashed out profits.
The Dow Jones industrial average closed down 99.80 points, or 1.1 percent, at 8,824.34, and the broader Standard & Poor’s 500-stock index fell 8.76 points, 1 percent, to close at 904.42. The Nasdaq composite index fell 10.58 points, or 0.7 percent, to 1,579.31.
“It’s still a tug of war between the bulls and the bears,” Sam Stovall, chief investment strategist at Standard & Poor’s equity research, told The Times. “The bears are saying, ‘I want to take profits when they come my way,’ and yesterday they came in a big way.”
The value of the dollar plunged against foreign currencies as investors bet that the Fed’s debt purchases and interest-rate policy would weaken the dollar. It fell to a 13-year low against the Japanese yen on Wednesday.
It was too soon to say whether the Fed’s dramatic rate cut would free up credit or jump-start borrowing in America’s consumer credit markets, but the effect on government debt was immediately clear on Wednesday.
The yield on the benchmark 10-year Treasury note fell to 2.19 percent from 2.26 percent late Tuesday. The price, which moves in the opposite direction from the yield, rose 20/32, to 113 26/32. The yield on the 30-year bond fell to 2.65 percent from 2.74 percent.
“As far as the Fed’s concerned, the lower the rates, the greater the possibility that when lending does occur, it’ll be at reasonable rates that trigger a lot of borrowing,” Joel Naroff, president of Naroff Economic Advisers, told The Times.
The steep drop in Treasury bills has exerted pressure on money market funds that buy only those government securities. A handful of those funds are reporting a negative yield, because the return on their investments is, in some cases, less than their management fees.
Some fund managers have waived their fees temporarily to offset the low yields on Treasury bills, said Peter G. Crane, president of Crane Data, which publishes information about the money market fund business. “If they stay down here, it will cause real pain,” he told The Times.
Financial stocks, the leaders on Tuesday, tugged stock markets down on Wednesday morning after Morgan Stanley posted a $2.36 billion fourth-quarter loss.
But Wall Street looked past the loss. Shares of Morgan Stanley rose 37 cents to close at $16.50.
Crude oil prices fell even as OPEC said it would cut production 2.2 million barrels a day on Jan. 1. Oil futures in New York dropped $3.54 to $40.06 a barrel.
The plunge in oil prices slowed energy companies but lifted transportation companies. Shares of airlines, including Southwest, Continental and JetBlue, all rose.
Even before the Fed cut rates, more people had begun applying for mortgages and refinancing their homes in response to falling loan rates, the Mortgage Bankers Association said. Mortgage applications increased 2.9 percent last week from a week earlier, while refinance applications rose 6.5 percent in a week.
Despite the increase, housing remained weak. Housing starts plunged to their lowest levels in decades, to a seasonally adjusted 625,000, the Commerce Department said Tuesday, and analysts said construction would remain sluggish in the coming months.
The Commerce Department also said that the current account deficit, a broad measure of United States trade, fell 3.7 percent to $174.1 billion in the third quarter.
