NEW YORK - The compromise backed by President Obama and Republican leaders on extending tax cuts crushed bonds Wednesday 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 as if it is a done deal. Treasury prices dropped sharply, sending their yields higher for a second day.
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 such as Treasurys and 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 Wednesday saying that the tax relief could add between 0.5 and 1 percentage point to economic growth next year.
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 increasing budget deficits.
Stock indexes wobbled for most of the day before turning positive in the afternoon.
The Dow Jones industrial average edged up 13.34 points, or 0.1 percent, to 11,372.50.
The broader Standard & Poor's 500 index rose 4.53 or 0.4 percent, to 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 2 percent to $78.74, making it the biggest decliner among the Dow components. The company reported November sales figures that fell short of analysts' expectations.
Fortune Brands Inc. rose 1 percent to $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.