Fed Plan Sends Dow Soaring Over 400 Points

By , Money Morning •

By Jennifer Yousfi
Managing Editor

News that the U.S. Federal Reserve will offer $200 billion in Treasuries in exchange for debt that includes mortgage-backed securities (MBS), increasing liquidity in the financial industry, spurred the markets to their largest rally in five weeks yesterday (Tuesday).

"They're trying to put out fires to the best extent they can," David Greenlaw, chief fixed-income economist at Morgan Stanley (MS) and a former New York Fed researcher, told Bloomberg News.

The markets opened strong after the announcement with all three indices up by over 2% in early morning trading. As the day progressed, some of those gains were pared back at noon. But an afternoon rally sent the Dow Jones Industrial Average Index soaring to a gain of over 400 points for the day.

At the New York close, the blue-chip Dow had an increase of 415.44 points (3.54%), to trade at 12,155.59. The tech-laden Nasdaq Composite Index rose 86.22 points (3.97%), to reach 2,255.56. And the broader Standard & Poor's 500 Index gained 46.98 points (3.69%), to settle at 1,320.35.

It's a bold move for the Fed and represents the first time the U.S. central bank will lend Treasuries secured by a pledge of MBS assets. The Fed also announced it would coordinate efforts with the Bank of Canada, the Bank of England, the Swiss National Bank and the European Central Bank. These banks will also inject liquidity into their respective markets.

"What the move really did is begin to provide some liquidity back into credit markets," Kevin Cronin, head of investments at Putnam Investments in Boston, with $185 billion in assets under management, told Bloomberg News. "It's provided some oil to the engine on the credit side, that's one of the things the equity market has recognized."

Citigroup Inc. (C) led the financial blue-chip rally with an increase of over 9% to close at $21.49. Shares of mortgage lenders soared as Fannie Mae (FNM) increased 11% to close at $22.00 and Freddie Mac (FRE) increased almost 16% to close at $20.16.

In overseas markets, Japan's Nikkei Index had a 126.15-point increase to close at 12,658.28. Hong Kong's blue-chip Hang Seng Index increased 290.30 points to close at 22,995.35.

In Europe, major indices were rallied on news of the Fed's plan to boost liquidity in late afternoon trading. The Paris-based CAC40, London's FTSE 100, Madrid's IBEX 35 and the Frankfurt-based DAX all posted gains.

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