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Stocks edge higher, Treasurys fall on tax-cut plan
Source: Agencies |
December 9, 2010, Thursday
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THE compromise backed by President Barack Obama and Republican leaders on extending tax cuts crushed bonds yesterday as traders expected the plan to lead to higher budget deficits and a pickup in economic growth. Stocks posted modest gains.
Congressional Democrats could still scuttle the tax agreement, but bond traders are acting like it's a done deal. Treasury prices dropped sharply, sending their yields higher for a second day. The yield on the 10-year Treasury note rose to 3.24 percent, the highest level since June 21 and a huge jump from the 2.93 percent it was trading at Monday before the tax deal was announced.
Part of the reason bonds are selling off is that investors now expect the tax package, which also includes an extension of unemployment benefits, to lead to better growth in the U.S. economy. That means less incentive to keep money parked in ultra-safe investments like Treasurys and also a greater likelihood of inflation, which would erode the value of the fixed payments from bonds.
Economists are already raising their estimates for economic growth as a result of the tax-cut package. Goldman Sachs economists released a rough estimate yesterday saying that the tax relief could wind up adding between 0.5 and 1 percentage point to economic growth next year.
"There is no question that near term this tax deal will be a net positive for the economy because it will help growth," said Nariman Behravesh, chief economist at IHS Global Insight.
Another reason the tax package is pushing bond prices lower is that it will lead to a greater supply of Treasurys in the marketplace as the U.S. government issues more debt to finance its increasingly large budget deficits. Estimates of the total cost of the tax-cut package vary widely but go as high as US$900 billion over the next few years.
Higher Treasury rates ripple through every corner of the economy, raising borrowing costs for the government, business and consumers. The Treasury Department auctioned another US$21 billion in 10-year notes yesterday at a rate of 3.34 percent, the highest since May. The Treasury will sell US$13 billion in 30-year bonds Thursday. Selling long-dated bonds is often tricky: investors like the higher yields, but 30-year bonds would get hit the hardest if inflation picks up.
The Mortgage Bankers Association also reported that mortgage applications slipped last week as refinancing activity fell. The average rate for a 30-year fixed loan rose to 4.66 from 4.56 percent the previous week.
Stock indexes wobbled for most of the day before turning positive in the afternoon.
The Dow Jones industrial average edged up 13.32 points, or 0.1 percent, to 11,372.48.
The broader Standard & Poor's 500 index rose 4.53 or 0.4 percent, to a new yearly high of 1,228.28. The index last traded at this level in late September 2008. It is now up 10.1 percent for the year.
Four of the 10 company groups in the S&P index rose. Financials rose the most with a 1.8 percent gain. Bank of America Corp. rose 3.7 percent to lead the 30 stocks that make up the Dow.
The Nasdaq composite index rose 10.67, or 0.4, to 2,609.16.
The higher rates in the Treasury market helped push the dollar up against other currencies including the Japanese yen and the euro. The dollar rose 0.2 percent against an index of six other major currencies.
In corporate news, McDonald's Corp. fell 1.6 percent to US$78.74, making it the biggest decliner among the 30 stocks that make up the Dow. The company reported November sales figures that fell short of analysts' expectations.
Fortune Brands Inc. rose 1 percent to US$61.76 after the company announced plans to split into three parts. Fortune will keep its liquor business led by Jim Beam bourbon while shedding the units that make Titleist golf balls, Moen faucets and Master Locks.
Two stocks fell for every one that rose on the New York Stock Exchange. Consolidated trading volume came to 7.6 billion shares.
Congressional Democrats could still scuttle the tax agreement, but bond traders are acting like it's a done deal. Treasury prices dropped sharply, sending their yields higher for a second day. The yield on the 10-year Treasury note rose to 3.24 percent, the highest level since June 21 and a huge jump from the 2.93 percent it was trading at Monday before the tax deal was announced.
Part of the reason bonds are selling off is that investors now expect the tax package, which also includes an extension of unemployment benefits, to lead to better growth in the U.S. economy. That means less incentive to keep money parked in ultra-safe investments like Treasurys and also a greater likelihood of inflation, which would erode the value of the fixed payments from bonds.
Economists are already raising their estimates for economic growth as a result of the tax-cut package. Goldman Sachs economists released a rough estimate yesterday saying that the tax relief could wind up adding between 0.5 and 1 percentage point to economic growth next year.
"There is no question that near term this tax deal will be a net positive for the economy because it will help growth," said Nariman Behravesh, chief economist at IHS Global Insight.
Another reason the tax package is pushing bond prices lower is that it will lead to a greater supply of Treasurys in the marketplace as the U.S. government issues more debt to finance its increasingly large budget deficits. Estimates of the total cost of the tax-cut package vary widely but go as high as US$900 billion over the next few years.
Higher Treasury rates ripple through every corner of the economy, raising borrowing costs for the government, business and consumers. The Treasury Department auctioned another US$21 billion in 10-year notes yesterday at a rate of 3.34 percent, the highest since May. The Treasury will sell US$13 billion in 30-year bonds Thursday. Selling long-dated bonds is often tricky: investors like the higher yields, but 30-year bonds would get hit the hardest if inflation picks up.
The Mortgage Bankers Association also reported that mortgage applications slipped last week as refinancing activity fell. The average rate for a 30-year fixed loan rose to 4.66 from 4.56 percent the previous week.
Stock indexes wobbled for most of the day before turning positive in the afternoon.
The Dow Jones industrial average edged up 13.32 points, or 0.1 percent, to 11,372.48.
The broader Standard & Poor's 500 index rose 4.53 or 0.4 percent, to a new yearly high of 1,228.28. The index last traded at this level in late September 2008. It is now up 10.1 percent for the year.
Four of the 10 company groups in the S&P index rose. Financials rose the most with a 1.8 percent gain. Bank of America Corp. rose 3.7 percent to lead the 30 stocks that make up the Dow.
The Nasdaq composite index rose 10.67, or 0.4, to 2,609.16.
The higher rates in the Treasury market helped push the dollar up against other currencies including the Japanese yen and the euro. The dollar rose 0.2 percent against an index of six other major currencies.
In corporate news, McDonald's Corp. fell 1.6 percent to US$78.74, making it the biggest decliner among the 30 stocks that make up the Dow. The company reported November sales figures that fell short of analysts' expectations.
Fortune Brands Inc. rose 1 percent to US$61.76 after the company announced plans to split into three parts. Fortune will keep its liquor business led by Jim Beam bourbon while shedding the units that make Titleist golf balls, Moen faucets and Master Locks.
Two stocks fell for every one that rose on the New York Stock Exchange. Consolidated trading volume came to 7.6 billion shares.
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