US stocks shot up yesterday afternoon, with the Dow briefly jumping more than 450 points, as the government’s actions to help rescue banks from toxic mortgage debt reassured investors at the end of a gut-churning week on Wall Street.

Treasury bond prices plunged as investors bailed out of the safe-haven commodity and poured money into equities. The plunge lifted yields, with the ten-year note hitting 3.77 per cent. Prices and yields move in opposite directions.

The Dow Jones industrial average added 440 points, or 4 per cent over 3 hours into the session. The Standard & Poor’s 500 index jumped 4.6 per cent. The Nasdaq composite gained 4 per cent. Small cap stocks jumped too, with the Russell 2000 up 3.6 per cent.

Watershed moment

“We’ve figured out a plan that could restore health to the financial system,” said Phil Dow, director of equity research at RBC Wealth Management. “It doesn’t mean that stocks will go straight up from here, but the fundamentals have changed and that’s going to support markets going forward.”

The economy still has work to do and the problems in financials have not disappeared as a result of yesterday’s announcements, but confidence has been restored, said Fred Dickson, chief market strategist at D A Davidson & Co.

“It’s a seminal moment in the crisis,” Dickson said. “It doesn’t mean we’re out of the crisis, but the net impact is that people will feel more comfortable investing again.”

“This may prove to be a big watershed for US financials because it could allow the banks to benefit again from rising stock prices and to clear their balance sheets,” Dow said.

Dickson said the support for the money market funds was perhaps the most significant development announced yesterday in that it insures that funds will be available to millions of depositors.

“The number one fear for investors has been ‘with banks going under, where do I put my money?’ he said. “This addresses that.”

Simultaneously, the Fed will lend an unlimited amount of money to banks so they can buy short-term debt issued by corporations from the money market funds. These holdings have come under pressure after investors cashed in a record US$169 billion in money market assets in the past week.

The short-selling ban is a good short-term means of helping finance companies pull out of their slump, said Art Hogan, chief market strategist at Jefferies & Co.

On a broad level, yesterday’s announcements are key to helping restore stability. “Whether it’s tangible or emotional, we’re getting markets back up to where they should be,” Hogan said.

Financial crisis

The developments were critical at the end of an extraordinary week that began with Lehman Brothers filing the biggest bankruptcy in history.

Also this week, Merrill Lynch was bought by Bank of America in a US$50 billion stock deal, American International Group (AIG) narrowly avoided bankruptcy after the Fed bailed it out with an US$85 billion bridge loan and speculation swirled about the fates of Morgan Stanley, Goldman Sachs and Washington Mutual.

Yesterday’s news seemed to cool fears, giving a boost to all the companies that were at the source of the panic. Merrill rose 25 per cent, Bank of America gained 17 per cent, AIG rose 17 per cent, Morgan rose 24 per cent, Goldman rose 21 per cent and WaMu rose 29 per cent.

CNNMoney.com