Stocks rally on report of federal entity for bad debt; Dow up 410

A repository for soured mortgage debt could help alleviate the grinding of the gears in the world's credit markets have driven up the cost of borrowing for businesses; banks have become hesitant to make loans even to each other in recent days for fear of what institutions might be hobbled by soured debt. Investors are also contending with worries that more big-name financial companies could falter.

Fear in the markets had led to speculation about the future of such major players as thrift bank Washington Mutual and investment bank Morgan Stanley. Media reports have been saying that Wells Fargo and Citigroup are interested in a possible takeover of Washington Mutual; and a person familiar with the negotiations said Morgan Stanley and Wachovia are in talks about a possible combination. He spoke on condition of anonymity because the talks are ongoing.

"We're seeing a tremendous amount of nervousness. That nervousness is leading to volatility," said Anthony Conroy, head trader for BNY ConvergEx Group. He said the markets hadn't seen as much fractiousness since the 1920s.

Advancing issues outnumbered decliners by more than 3 to 1 on the New York Stock Exchange, where volume came to 2.45 billion shares compared with 2.14 billion traded Wednesday. Trading remained heavy as it has all week amid investors' fears about the well-being of the financial system. Beyond general uncertainty, traders were positioning themselves ahead of Friday's "quadruple witching," which marks the simultaneous expiration of four types of options contracts and can exacerbate volatility.

Investors shying from the risks of stocks turned to government-backed debt. On Wednesday, the 3-month Treasury bill — considered one of the safest short-duration assets — saw demand surge so high that its yield briefly dipped into negative territory for the first time since 1940. Investors are so focused on parking their money in safe assets that they're willing to take very little return on such investments.

The prices for short-duration Treasurys fell from Wednesday's levels. But the yield on the 3-month T-bill was still extremely low at 0.23% — up from 0.2% late Wednesday, but well below its yield of 1.60% just a week ago.

Longer-term bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, jumped to 3.55% from 3.42% late Wednesday.

Investors also continued a move into other safe havens, though demand eased somewhat as stocks soared. Gold rose again Thursday, up $50.20 to $900.70 an ounce on the New York Mercantile Exchange after posting its largest ever one-day price jump Wednesday.

Oil shot up early in the day, moving back above $100 as investors sought it as another haven. But crude fell back with the market's realization that the financial turmoil will likely exacerbate the drop in demand that has taken oil down sharply from its July record of $147.27 a barrel.

Light, sweet crude on the Nymex rose 72 cents to settle at $97.88 a barrel.

"We are in uncharted territory," said Linda Duessel, the equity market strategist at Federated Investors. "The seriousness and the size of this fallout has been underestimated from the beginning. It's most disconcerting what's going on in the credit market."

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