With eyes on Washington, investors reclaim ground

The stock market rebounded from one of its worst beatings in decades yesterday, surging higher across the board on hopes Congress will return to work and agree on a bailout plan for the nation's financial system soon.

Stocks gained back more than half the ground they lost in Monday's dramatic sell-off. The Dow Jones industrial average soared 485.21 to 10,850.66, an advance of 4.7 percent. The Standard & Poor's 500 index, which suffered its biggest one-day percentage decline in 21 years on Monday, jumped 5.3 percent yesterday.

Credit markets were not so uniformly upbeat. Prices for US Treasury securities declined, indicating pressure from investors rushing to the safest possible investment haven had eased somewhat. Yields on three-month Treasury bills, which move in the opposite direction of prices, climbed from 0.35 percent to 0.9 percent yesterday.

Key indicators that determine bank and business loan rates got worse, suggesting there is no relief in sight for the global credit crunch that is curtailing lending and threatening the econ omy. The cost of borrowing in dollars overnight in London soared 4.31 percentage points to an all-time high of 6.88 percent, threatening more overseas banks in a dangerous financial squeeze. US commercial paper yields, interest on short-term debt issued by businesses, jumped sharply to an eight-month-high of 3.95 percent.

None of that, however, seemed to affect stock investors, who appeared to be completely focused on developments in Washington and expecting progress.

Meg McMullen, chief executive of New England Research & Management Inc., an investment firm with offices in Boston and Chicago, said stock buyers anticipated Congress would take up a retooled rescue bill by the end of the week. "People are going to come back and vote by Friday, and the pressure is on," she said.

With the market selling off so dramatically Monday, buyers with cash came back for bargains, McMullen said. "We've never seen such declines in stock prices. There was huge panic selling on Main Street. People are afraid."

And some investors are still waiting to pounce, anticipating stock prices going lower, she said. "There are lots of people sitting on the sidelines with lots of cash."

Despite yesterday's rally, stock prices are still down sharply this week. The Dow, an index of 30 top industrial stocks, has lost 2.6 percent, and the S&P 500 index is down 4 percent. Prospects for passage of the government's bailout plan have driven most of the stock market's volatility this week, but broader concerns for the economy remain, no matter what happens in Washington.

"As we live and die by this volatility, we have to remember the market was down a couple hundred points Monday morning when it assumed this deal was going to pass," said Art Hogan, chief market analyst at Jefferies & Co. in Boston. "We'll have to remind ourselves this won't be the end-all and cure-all."

But the relief among investors was palpable yesterday, lifting all parts of the stock market. About nine of every 10 stocks in the S&P 500 index gained ground, and many of the biggest losers of Monday's market sell-off were some of the biggest winners.

In Boston, that meant financial stocks. State Street Corp. soared $12.88 to $56.88. Eaton Vance Corp. climbed $5.73 to $35.23, and Affiliated Managers Group jumped $8.85 to $82.85.

Shares of Sovereign Bancorp., which plunged 72 percent on Monday, recovered $1.62 to $3.95. The company with the third-largest banking franchise in Massachusetts replaced its chief executive and reiterated that it had the financial strength to weather current conditions.

Stock prices overseas also recovered yesterday, but more modestly. Most major stock indexes in Europe climbed between 1 and 2 percent.

Stocks in Brazil, which closed its market after steep losses on Monday, jumped 7.3 percent yesterday.

News of the Irish government taking action to shore up its financial institutions was received positively in Europe and may have had a positive effect here, according to Bernard R. Horn Jr., president of Polaris Capital Management in Boston. Ireland said it would guarantee the deposits and debts of all its major banks, after an index of Irish stocks dropped 13 percent Monday.

"That really settled Europe down a fair amount. And it provided a very well thought out, good example of how governments can actually play a role in fixing a big problem, which is a crisis in confidence," Horn said.

Steven Syre can be reached at syre@globe.com, Beth Healy can be reached at bhealy@globe.com.