Treasury calms bond market, stocks snap slide

US stocks rose on Wednesday and the S&P 500 snapped a three day losing streak, closing up 0.2% at 7,707.98. The Dow Jones Industrial Average added 0.2% to 53,463.05 and the Nasdaq Composite rose 0.2% to 26,331.09, with smaller companies doing better than large ones as the Russell 2000 gained 0.5%. The trigger was not a company or an economic report but the Treasury Department, which said it would sharply increase its purchases of its own long dated bonds, sending the 30 year Treasury yield down roughly 9 basis points to about 5.20% a day after it touched its highest level in 19 years.

Start with the thing that has been driving markets all week, which is the price of long dated government bonds. The US government funds itself by selling bonds, which are IOUs that pay interest for a set number of years, and the yield is the annual return a buyer earns at the price they paid. Price and yield move in opposite directions, so when the government needs to sell a lot of bonds and there are not enough willing buyers, the price falls and the yield rises. Since late June, buyers had largely stepped back from the longest dated bonds, which is why the 30 year yield kept climbing to levels last seen in 2007.

On Wednesday the Treasury Department stepped in as a buyer itself. It said it would at least double the size of each of its buyback operations, which are transactions where the government uses cash to repurchase bonds it has already issued from investors in the open market, raising the maximum from $2 billion to at least $4 billion per operation. The purchases will run from September 9 to November 4 and will focus on bonds maturing in 10 to 30 years, exactly the stretch of the market where buyers had gone quiet. Adding a large, guaranteed buyer to a market short of them lifts bond prices, and because price and yield move in opposite directions, yields fall.

That matters to stocks because a bond yield is the risk free return an investor can lock in instead of buying shares. When that return climbs, shares have to look cheaper to compete, and companies whose value rests on profits expected many years from now suffer most, because those distant profits are worth less in today's money when the discount applied to them rises. Easing yields took a little of that pressure off, though not evenly. Health care and economically sensitive companies rallied while semiconductor stocks fell again, and Moderna nearly tripled, closing up about 177% at $174.38, after a late stage trial showed its personalized cancer vaccine paired with Merck's Keytruda immunotherapy met its goals in melanoma. Merck rose about 12%. Retail earnings were the day's sour note, with Target down about 2%, Lowe's down about 4% and TJX down about 5%, all on cautious outlooks rather than weak results.

The Federal Reserve also released the minutes of its July meeting, a written record of the internal debate published three weeks after each meeting. They showed a 9 to 3 vote to leave rates alone, with three regional Fed presidents wanting a quarter point increase and many other officials saying tightening would be needed if inflation did not come down. That is a hawkish record, meaning it leans toward higher rates, and it did not stop the bond rally, which tells you how much the Treasury news dominated the day.