Stocks climb, Treasuries retreat as Fed plans to buy mortgages

U.S. stocks rallied, sending benchmark indexes to the highest levels since 2007, and Treasuries retreated as the Federal Reserve said it will buy mortgage securities to bolster the economy.

The Standard & Poor’s 500 Index climbed 1.1 percent to 1,452.88 at 1:29 p.m. in New York after rising no more than 0.2 percent before the Fed statement. Ten-year Treasury yields rose one basis point to 1.77 percent after falling as much as five points earlier. Oil climbed 1.1 percent to $98.11 a barrel, a four-month high. The Dollar Index, a gauge of the currency against six peers, fell 0.4 percent to the lowest since May.

The Fed said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month and hold the federal funds rate near zero “at least through mid-2015.” The Fed will continue its purchases of agency mortgage-backed securities and undertake other efforts to help the labor market if the outlook for employment does not improve, the Federal Open Market Committee said today.

“What the market didn’t expect was having this labor market kicker,” John Canally, an economist and investment strategist at LPL Financial Corp. In Boston, said in a telephone interview. The firm oversees about $350 billion. “They’ve targeted the unemployment rate, which was outside the band of what the market was expecting,” he said. “That’s what is adding to the risk-on trade here.”

Market Leaders

Commodity producers, financial and technology stocks led gains as all 10 of the main industry groups in the S&P 500 advanced. Bank of America Corp., Alcoa Inc. and American Express Co. climbed more than 1.9 percent to lead an advance in 29 of 30 stocks in the Dow Jones Industrial Average.

Pall Corp. rallied 8.1 percent as it reported quarterly earnings that topped analysts’ estimates. Apple Inc. added 1.5 percent after yesterday introducing a new version of the iPhone that has a bigger screen, a faster chip and access to speedier wireless networks. Northrop Grumman Corp. slumped 3 percent after UBS AG cut the stock to sell, saying the company is “most exposed” to U.S. budget cuts.

Both the S&P 500 and the Dow today climbed above their highest closing levels since December 2007, two months after each gauge set a record high.

Previous efforts by the Fed to safeguard the U.S. economic recovery have helped extend a rally in stocks over the last three years. The S&P 500 has rebounded as much as 113 percent from a bear-market low in March 2009 through the end of last week.

Asset Buys

The Fed fought the financial crisis by keeping the main interest rate close to zero since December 2008 and through two rounds of quantitative easing. In the first round starting in 2008, the central bank bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries.

The actions also helped send rates on U.S. government securities to record lows. The 10-year note’s yield touched an all-time low of 1.38 percent in July, while 30-year bond rates sank as low as 2.44 percent the same month.

Fed Chairman Ben S. Bernanke is enlarging his supply of unconventional tools to attack unemployment stuck above 8 percent since February 2009, a situation he has called a “grave concern.” The decision risks provoking a renewed backlash from Republicans, including presidential nominee Mitt Romney, who say Bernanke’s policies threaten to ignite inflation while doing little to spur the economy.

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