In late trading, the 10-Year Treasury Note was down by 1-6/32, raising its yield to 3.60%; the Dow was up by 416.66 points to 12,156.81; and the Nasdaq was up by 86.42 points to 2,255.76.

The Fed action to lend up to $200 billion in Treasuries to securities dealers in exchange for such beleaguered collateral as mortgage-backed securities improves the financial condition of the investment companies and lubricates lending channels in general.

The news comes a week before the Fed's regular monetary policy meeting. Though the meeting is expected to result in another cut in the central bank's target for the fed funds rate (overnight borrowing rate between banks) and the rate charged by the Fed for direct loans (discount rate), estimates of the size of the cuts and the prospects of future cuts are now murkier.

Another plus for stocks came in the economic release of the day. Though the trade deficit widened slightly in January, the gap was not as large as anticipated and the data for the previous six months were revised to show smaller deficits than previously reported.

As noted in the first paragraph above, stocks had taken sharp losses in the last few sessions and the technical aspect of the market may have contributed to the extent of today's rally. The momentum was not even slowed by another rise in oil futures. Prices gyrated as commodity traders reacted to the implications of the Fed news and the changes in the other markets, but the price of a barrel of light, sweet crude for next month delivery ultimately rose by $0.85 on the New York Mercantile Exchange to settle at a new record high of $108.75.

The Dow gained 3.55% on the day, the largest percent jump since March 17, 2003. The point jump was the largest since July 29, 2002. The S&P 500 rose by 3.71% today and the Nasdaq rose by 3.98%.

In the bond market, the curve-flattening trend of the last few sessions continued today. Whereas the spread between the 2- and 10-Year Treasury Note closed at 207 basis points last Thursday (the widest spread since June of 2004), by the end of today's trading, it had narrowed to 186 basis points. The spread between the 10- and 30-Year Treasuries closed yesterday at 101 basis points (the widest since July of 2003) and closed today at 91 basis points.

There are no major economic releases slated for tomorrow morning but a couple of minor ones could have an impact on the markets. The Mortgage Bankers Association of America will release its index data on last week's application activity.

The data series has been exceptionally volatile lately. The last report said the overall application index rose in the week of February 29 by 3.0%. This followed three weeks of declines totaling 38.8% after five weeks of increases totaling 103.5% which, in turn, followed three weeks of declines totaling 34.2%.

Traders will also be watching the weekly report on oil inventories. Last week's report said that crude oil supplies fell the week before. This raised alarms since it was the first decline in eight weeks. The report also noted a decline in distillate inventories, which include diesel and heating fuel. However, a positive detail was that gasoline inventories had risen for a seventeenth consecutive week.

Tomorrow afternoon, the Treasury will release its latest budget figures. In February of last year, receipts exceeded outlays by $120.0 billion. Due to shrinking revenues and increased outflows, a larger gap of about $140.0 billion is predicted for last month.

If this estimate is accurate, it would push the running total for the current fiscal year to date (begun last October) to a deficit of $227.7 billion, a much larger gap than the $162.2 billion for the same period in the last fiscal year. In fact, it would be the worst deficit reading for the first five months of a fiscal year since 2004.

High deficit figures are a negative for Treasuries since it means the government will have to issue more debt securities (Treasuries) in the future to cover operating expenses and interest on existing debt. The increased supply projections dilute the value of those securities already in the market.

10:30 AM EDT : Another program initiated by the Federal Reserve to head off a credit crunch has sparked a strong rally in the stock market and Treasuries are sharply lower as recent safe-haven positions are being unwound. The economic news of the day also favored stocks.

The Federal Reserve announced today that it was establishing a Term Securities Lending Facility (TSLF), which will allow primary securities dealers to borrow Treasuries from the Fed for a term of 28 days, using a variety of collateral including mortgage-backed securities. Up to now, dealers could only borrow Treasuries from the Fed for one day. The new program is intended to promote liquidity in the financial markets. (FED STATEMENT)

The move will put more Treasuries into the market and the increased supply is a negative for those already being traded. In addition, the move further eases pressure on the Fed to keep lowering interest rates. Lastly, the reduced credit concerns are improving the mood of stock traders and the resulting surge in stocks is pulling more investment flows away from bonds.

The Fed has already reduced the overnight borrowing rate between banks by 2.25% since last September and reduced the rate for loans to banks directly from the Fed by 2.75% since last August. In addition, in December, the Fed institited a Term Auction Facility (TAF), another means by which banks could obtain needed reserves.

Today's news has also lent support for the dollar and as it rises, the hedge value of commodities such as oil declines. Oil may also be vulnerable to profit-taking. The front month contract for crude oil rose to almost $110.00 per barrel in overnight trading but was recently trading at $107.24. If the price continues to fall, it will be another positive development for stocks.

In today's economic news, the Commerce Department reported that the seasonally adjusted value of imports exceeded that of exports by $58.2 billion in January. While the deficit figure was larger than December's, it was notably less than the $59.5 billion that analysts had predicted. Moreover, data revisions trimmed December's originally reported gap of $58.8 billion to $57.9 billion. Revisions also trimmed each of the preceding four months' deficit readings by $0.5 billion, though each of the deficits of the first six months of last year was revised higher by $0.1 billion.

January's report indicated a 1.6% jump in the value of exports between December and January but the larger import category rose by 1.3%. The values of both categories posted record highs. The smaller deficit figures mean smaller trade-related subtractions from gross domestic product estimates . . . .

source: Lion, Inc.