Treasuries, Dollar Rise While Stocks, Commodities Prices Slump

Dec. 7 (Bloomberg) -- Treasuries advanced, the dollar gained versus the euro while stocks, gold and oil declined after Federal Reserve Chairman Ben S. Bernanke said the U.S. economy faces “significant headwinds” and inflation “could move lower.”

Two-year Treasury notes rose, driving their yield down seven basis points to 0.76 percent at 4 p.m. in New York. The dollar rose 0.3 percent to $1.4817 per euro and earlier appreciated to the strongest level since Nov. 4. The Standard & Poor’s 500 Index lost 0.3 percent, reversing a 0.4 percent gain. Gold futures slumped 0.5 percent in New York, giving the metal the steepest two-day drop since October 2008. Crude slumped to $73.93 a barrel in its fourth straight decline.

Investors sold riskier assets after Bernanke said the U.S. economy’s expansion will be limited by a weak labor market and tight credit. He has led the most aggressive monetary stimulus in U.S. history, expanding the Fed’s balance sheet by $1 trillion and cutting the benchmark lending rate a year ago close to zero. Today, Bernanke said inflation may subside further because of the unemployment rate, which has increased to 10 percent for the first time since 1983.

“It’s reasonable to expect investors to become more risk averse,” said Eric Teal, who helps oversee $5 billion at First Citizens BancShares Inc. in Raleigh, North Carolina. “Some of the bullishness of the last few months will probably abate before the economic recovery becomes more sustainable.”

Surge Since March

The S&P 500 has surged 63 percent since March 9, the steepest advance since the Great Depression, while gold and oil jumped and the dollar weakened, spurred by record-low interest rates and $12 trillion in spending by governments worldwide.

After the 10 industry groups in the stock index posted gains ranging between 28 percent and 134 percent since March, the measure was valued at 22.2 times the reported operating earnings at its companies from the past year, the most expensive level since 2002, according to data compiled by Bloomberg.

Traders in the U.S. equity options market are girding for losses in the S&P 500, unconvinced by forecasts for the fastest U.S. earnings growth in 15 years. S&P 500 options to protect against declines in stocks over the next year cost 22 percent more than one-month contracts at the end of last week, the highest since 1999, data compiled by London-based Barclays Plc and Bloomberg show.

‘Precarious Position’

“We’re in a precarious position because we’ve had so much strength in so many sectors, some of which has been rational and some of which has been slightly irrational,” said Liam Dalton, who oversees about $1.4 billion as the New York-based chief executive officer of Axiom Capital Management. “But we’re out of the phase where the market dynamic is strong on the upside.”

The difference between Treasury 2- and 10-year yields reached the most since July before the U.S. sells $74 billion in notes and bonds in three auctions beginning tomorrow. The payout on the benchmark 10-year note fell four basis points to 3.43 percent.

The dollar appreciated against 14 of the 16 most-active currencies. The yen gained versus all of them, on speculation Japanese exporters took advantage of its biggest weekly drop since 1999 to buy the currency.

U.S. stocks declined as investor speculated the economy isn’t growing fast enough to shield banks from losses on commercial real estate. Financial shares in the S&P 500 retreated 1.6 percent, as Wells Fargo & Co. and JPMorgan Chase & Co. lost more than 1 percent. Exxon Mobil Corp. fell 0.7 percent on crude’s slump.

Gold, Oil

Gold futures for February delivery have now lost 4.5 percent since Dec. 3, closing at $1,164 an ounce in New York today. Crude oil futures expiring in January lost 2 percent.

Stocks in emerging markets dropped. The Dubai Financial Market General Index sank the most among benchmark equity indexes worldwide. The measure has tumbled 17 percent since Dubai announced on Nov. 25 that state-owned Dubai World would ask creditors for a “standstill” agreement on its debt, including property company Nakheel PJSC’s $3.5 billion bond due for repayment in a week.