Stocks Near 2-Year Highs; Bonds Suffer

Stocks Near 2-Year Highs; Bonds Suffer

By MARK GONGLOFF

Stocks crept to a two-year high on Tuesday on the back of positive economic news and a fresh commitment by the Federal Reserve to keep pumping cash into the markets.

Investors are dealing with a busy schedule of economic indicators and news, while preparing for the Federal Open Market Committee policy announcement at 2:15 pm. Stocks got an early lift on strong retail sales data, but Best Buy swooned on a poor earnings report. Donna Kardos Yesalavich, Kathleen Madigan and Michael Casey report.

.The rally was clouded, however, by another spike in government-bond yields, sending rates on 10-year Treasury notes to a seven-month high, and another brutal day for municipal bonds, whose rates rose to the highest levels since March 2009.

Though interest rates on Treasurys are rising partly because of better prospects for economic growth, they also could pose a challenge to housing and other sectors of the economy.

The Dow Jones Industrial Average rose 47.98, or 0.4%, to end the day at 11476.54, the blue-chip measure's highest close since Sep. 8, 2008, a week before the Lehman Brothers bankruptcy triggered a global financial crisis.

The Nasdaq Composite index rose 2.81, or 0.1%, to 2627.72. The Standard & Poor's 500-stock index rose 1.13 points, or less than 0.1%, to 1241.59, its highest close since Sep. 19, 2008.

Stocks barely registered the results of the latest Fed policy meeting Tuesday afternoon, the results of which surprised roughly no one. Policy makers kept overnight interest rates unchanged and pledged again to buy $600 billion in Treasury debt through next June in an effort to support risk-taking and economic growth.

But this easy-money spigot has already helped drive investors into stocks and other risky assets, contributing heavily to the Dow's 18.5% rally since early July. And few investors are willing to bet the cash-fueled rally will end any time soon.

"Equity guys love this. The more stimulus the better for them," said Joe Saluzzi, co-founder of Themis Trading in Chatham, N.J. "It's still this momentum-fueled craziness, this performance-chasing type of rally."

The risk-taking appetite was whetted early Tuesday with a batch of improved economic numbers. November retail-sales data from the Census Bureau topped forecasts, and small-business sentiment improved to its highest level in three years, according to the National Federation of Independent Business.

Also, corporate treasurers turned noticeably more optimistic in early December, according to the latest survey of chief financial officers by Duke University and CFO Magazine.

"There are still obviously risks and uncertainties out there, but this is the best survey we've had since before the recession," said Duke finance professor John Graham, director of the survey.

But the good economic news has contributed to an ongoing crunch in the Treasury market. The 10-year Treasury note ended Tuesday yielding 3.457%, its highest closing yield since May 17. Bond yields and prices move in opposite directions.

The 10-year note yield has surged more than a full percentage point since early October, driving mortgage rates higher and snuffing out a refinancing boomlet that had put billions of dollars in cash in consumers' pockets.

The 10-year yield has returned to its levels before the market started pricing in the latest Fed bond-buying program, noted David Ader, head of government-bond strategy at CRT Capital. "Is this the level of rates that makes the Fed nervous?" he asked in a note. "Well, it was in the second quarter of 2010."

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.Rates jumped in the hour after the Fed's decision, for little apparent reason, possibly contributing to a late-day pause in the stock rally. Selling has led to more selling in recent weeks as traders rush to cash in their still-profitable Treasury investments before year-end.

"This selloff has become a vicious, as opposed to a virtuous, cycle," said Russ Certo, co-head of rate trading at Gleacher & Co., a boutique investment bank and bond dealer.

Commodities were mixed on the day. Nymex crude-oil futures fell 33 cents to $88.28 a barrel. Comex gold edged up $6.30 to $1403.60 per ounce.

Meantime, muni bond prices fell sharply for the second day Tuesday, as investors worried about the impact of the end of the Build America Bond borrowing program.

The yield on a closely watched index of high-grade, tax-exempt 30-year muni bonds rose to 4.81%, its highest level since March 2009, according to initial indications from Municipal Market Data.

Another dark spot for the market was Best Buy, which tumbled $6.18, or 15%, to $35.52, after the company issued a dour report for the quarter ended Nov. 27, which included Black Friday. Best Buy's earnings came in well below analysts' estimates as revenue unexpectedly fell. The consumer electronics retailer also cut its earnings view for the year.

Bank stocks also fell, including Dow components J.P. Morgan Chase, down 0.72, or 1.73%, to 40.79, and Bank of America, off 0.14, or 1.12%, to 12.40.

The Dow was mainly led higher by technology giant IBM, up 1.54, or nearly 1.1%, to 145.82.

Among other stocks, Amgen rose 2.65, or 4.9%, to 56.76. The biotechnology company said a study of its key bone drug Xgeva showed it helped prostate-cancer patients live longer without the disease spreading to their bones.

HCP edged up 44 cents, or 1.4%, to 32.96, after the real-estate investment trust said it will buy all of the real-estate assets of privately owned nursing-home operator HCR ManorCare for $6.1 billion in a cash-and-stock deal.

Sanderson Farms rose 2.33, or 5.5%, to 40.15. The poultry producer's fiscal fourth-quarter earnings more than doubled as average market prices rose 3.2% and margins improved.

C.R. Bard advanced 3.52, or 4.1%, to 89.57. The medical-device maker said it is targeting double-digit earnings growth next year amid a boost from a stock buyback plan, and announced restructuring measures that will include job cuts.

Williams Partners LP slipped 2.42, or 5%, to 46.50. The natural-gas company said its planned sale of common units, which was raised in size to at least 8 million units, priced at an estimated $47.55 each, a 2.8% discount to Monday's close.

—Matt Phillips,
Romy Varghese
and Donna Kardos Yesalavich contributed to this article.
Write to Donna Kardos Yesalavich at donna.yesalavich@dowjones.com