Wall Street showed nascent confidence in the credit markets Wednesday, surging higher in response to a pullback in Treasurys and an increase in borrowing by banks. Investors saw both trends as signs that the Federal Reserve’s efforts to loosen up the credit market might be working.
The Dow Jones industrial average soared more than 140 points as the 3-month Treasury bill, which earlier in the week drew massive buying as investors sought the safety of short-term government assets, fell Wednesday. The selling boosted its yield to 3.66 percent, up from 3.59 percent late Tuesday and Monday’s low of 2.51 percent — an indication that stocks are no longer seen as risky as they were just a few days ago.
“It gives the market a little comfort that it’s not all about buying risk-free securities,” said Scott Wren, equity strategist for A.G. Edwards & Sons. “There’s less of a flight to quality. ... In my mind, the pullback in the stock market is entirely due to what’s going on in the credit market. The fundamentals have been good. Valuations are reasonable. It’s just the fear of the unknown in terms of the credit market.”
Wall Street, which has been angling for the Fed to help ease the credit crunch by cutting the benchmark federal funds rate, was knocked down several rungs in recent weeks by worries about lending troubles crimping economic and corporate growth.
Wednesday’s advance was Wall Street’s first substantial move higher after the Fed lowered its discount rate Friday, trying to calm investors and avert damage to the economy from the stock market turmoil. Although stocks rose Friday, the advance was seen as an attempt by investors to square their positions rather than a fundamental shift in sentiment. And trading Monday and Tuesday was clearly shaky.
However, market watchers cautioned that trading volumes were lower than normal Wednesday and that any troubling headline in the lending industry could still trigger credit fears and more selling.
Giving some investors reason to believe the steps the Fed has already taken may be enough, the nation’s four biggest banks — Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp. and Wachovia Corp. — said they each borrowed $500 million from the Federal Reserve’s discount window.
Investors were also heartened that dealmaking is persisting despite credit jitters. An affiliate of Dubai’s government said it was investing $5.1 billion in casino operator MGM Mirage; Nymex Holdings Inc.’s chairman said the commodities exchange has been meeting with suitors; and mining company Rio Tinto PLC said it was able to close the loan syndication to fund its buy of Canadian miner Alcan Inc.
According to preliminary calculations, the Dow rose 145.27, or 1.11 percent, to 13,236.13.
Broader stock indicators also jumped. The Standard & Poor’s 500 index rose 16.93, or 1.17 percent, to 1,464.05, while the Nasdaq composite index gained 31.50, or 1.25 percent, to 2,552.80.
As short-term government security prices fell, so did their longer-term counterparts. The 10-year Treasury note’s yield climbed to 4.64 percent from 4.59 percent late Tuesday.
Also calming investors, the Fed made a relatively small repurchase of $2 billion, in which it buys that amount in collateral from dealers, who then deposit the money into commercial banks.
The fed funds rate, the rate banks charge each other for loans, fell to 4.25 percent after opening at 5.125 percent. But traders who bet on the Fed’s next move were still pricing in an interest rate cut at its next meeting on Sept. 18. Some speculate the central bank will lower rates before then.
Wall Street’s sentiment could turn if it doesn’t get that rate cut — which is a distinct possibility, Wren said.
“I don’t want the stock market betting on, counting on, needing the Fed to cut rates in September,” Wren said. “There’s a lot of reasons why the Fed wouldn’t cut rates. They’ve been talking about inflation for forever.”
It’s a positive signal that banks are using the discount window as the Fed encouraged them to, said Michelle Girard, senior economist at fixed income firm RBS Greenwich Capital. On the other hand, she said, the four institutions that did so aren’t ones that have had difficulty tapping funds elsewhere.
The Russell 2000 index of smaller companies rose 10.18, or 1.29 percent, to 798.56.
Advancing issues outnumbered decliners by about 4 to 1 on the New York Stock Exchange, where volume came to 1.45 billion shares, up from 1.35 billion shares Tuesday but below last week’s levels.
The dollar was mixed against other major currencies. Gold rose.
Crude oil fell 31 cents to $69.26 a barrel on the New York Mercantile Exchange.