Business

Thar she blows up! fears fly

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Stocks yesterday retreated from record highs amid unrelenting rumors that the Fed will ease up on its bond-buying program sooner than expected.

If Federal Reserve Chairman Ben Bernanke isn’t there to buy up some of these junky bonds and bond securities, demand could dry up, investors fear.

Those concerns were felt most intensely in shares of troubled mortgage giants Fannie Mae and Freddie Mac, which cratered 29 percent and 30 percent, respectively, after UBS market guru Art Cashin reminded folks that the Fed’s buying of mortgage bonds will end some day.

In a research note, Cashin, quoting mortgage expert Barry Habib, said the Fed’s monthly purchases of mortgage-backed securities has tapered recently to $65 billion from $80 billion.

Cashin attributed the decline to fewer loans being originated for refinancing in March, when rates had spiked. Despite that explanation, the note served as a lighted match in dry timber — inflaming investors’ fears of a tapering in the latest round of quantitative easing, or QE3.

The Dow Jones industrial average closed down 106.59 points, to 15,302.80, reversing gains from Tuesday that helped the index of blue-chip stocks set a record high of 15,409.09. For the year, the Dow is up a whopping 16.8 percent.

Watchers cited fears that the Fed could be looking to wean the bond market off Uncle Sam’s endless milk supply.

The S&P 500 index dropped 11.70 to 1,648.36 and the Nasdaq composite index was off 21.37 to 3.467.52.

The roller-coaster ride at Fannie and Freddie also coincided with the news that Bruce Berkowitz’s Fairholme Capital Management has taken a roughly $500 million preferred-equity stake in the two companies.

That may have served as a reminder that preferred shareholders will be paid out before common stockholders in any restructuring of the two mortgage giants.

Fannie and Freddie are still up for the year amid growing bets by hedge funds and other speculators that the government will seek to restructure the companies. Fannie is up 1,037 percent year-to-date, while Freddie is up 892 percent.

For a second day in a row, the benchmark 10-year Treasury saw yields wend above 2 percent as investors bet rates will rise.

Bernanke has said he will ease bond buying if he sees sufficient signs that the economy is improving. But some investors have expressed concern that in the temperamental economy, such a course could throw the recovery into reverse.

“We’ll have days when people are focusing on the positive economic story and days when people are focusing more on the issue that the Fed has in terms of slowing down their asset purchases and eventually moving interest rates,” Dan Curtin of JP Morgan Private Bank told Bloomberg News.