The Federal Reserve's move to prop up the economy with a new round of bond purchases promises to add more fuel to the fire driving one of the most powerful trends in financial markets: the search for ever-scarcer yield.

New Fed efforts to juice the U.S. economy sent stocks and gold higher, rattled currency trading and pushed down the price of U.S. government debt. Barron's Michael Santoli has details on The News Hub. Photo: Reuters.

The Fed said it would buy $40 billion of mortgage-backed securities each month, immediately driving down yields of those bonds. The open-ended program is likely to keep those yields low for the foreseeable future, just as the Fed's intervention in the Treasury market will keep a lid on yields there.

As a result, investors are being pushed to buy ever-increasing amounts of risky, higher-yielding assets, just to show some returns from their portfolios, regardless of the central bank's success in supporting the economy. With that in mind, many headed on Thursday to stocks, including emerging-market shares, and high-yield bonds.

The Dow Jones Industrial Average, which has climbed 12% since hitting a closing low this year on June 4, tacked on 206.51 points, or 1.5%, to 13539.86, its highest level since December 2007. Gold, which often gets a two-pronged boost from a falling dollar and worries about inflation, jumped 2.2% to its highest level since February. The Russell 2000 index of small-capitalization stocks, which are considered riskier than their large-cap peers, gained 1.3%.

With the Fed saying it planned to continue bond purchases until the economy shows sustained improvement and pledging to keep rates low until mid-2015, these trends could potentially play out for years to come.

"The search for yield is going to go on for longer and may still grow more intense," said Rebecca Patterson, chief investment officer at Bessemer Trust. "Whether we're talking about high dividend stocks, corporate bonds or emerging-market bonds, all those things will continue to find support."

But the rising prices mean investors are accepting smaller returns to take on those risks than would have been the case not long ago. The Fed "is putting a lot of investors in a place where they wouldn't normally be comfortable," Ms. Patterson said.

Starting with the Fed's first round of bond buying, known as quantitative easing, in late 2009, the Fed has steadily squeezed investors out of the safest investments. It has done so by big purchases of bonds, mainly Treasurys.

When the Fed on Nov. 25, 2008, announced what is now known as QE1, which eventually totaled $1.75 trillion, the Dow had rallied 56% by the time the program ended in March 2010, as investors piled into stocks. A similar phenomenon took place after Mr. Bernanke signaled a second round of easing, known as QE2, in August 2010.

This time around, investors trying to get ahead of any Fed action stoked the Dow's rally in the beginning of June, when a disappointing jobs report began fueling hopes of Fed intervention. With Thursday's surge, the Dow is now less than 5% off the record it hit in October 2007.

Meanwhile, the Fed has pushed yields on U.S. government bonds much lower than many investors had expected, with the yield on the 10-year Treasury note finishing Thursday's trading at 1.752%. That is up from the record low 1.379% it grazed in late July.

"The Fed is openly doing everything they can to make certain assets as unattractive as possible," said Stephen Cucchiaro, chief investment officer at Boston-based Windhaven Investment Management.

The Fed has vacuumed up large chunks of the Treasurys market. This year alone it has bought $360 billion of Treasurys maturing over the next seven to 30 years. That is roughly 65% of the $556 billion in gross issuance of such bonds, according to Barclays PLC.

Specialist Frank Babino, center, at his post on the floor of the New York Stock Exchange on Thursday as the Fed's moves were announced. Associated Press

With the Fed already having pushed many other investors out of the U.S. Treasurys market, QE3 appears likely to do the same for the mortgage-backed securities market. This market, which is made up of bonds comprising mortgages backed by government-controlled agencies Fannie Mae, Freddie Mac and Ginnie Mae, was an arena to which many investors had turned as a way to get slightly higher yields along with the backing of the U.S. government.

Now, the Fed's new purchases, coupled with money that will be reinvested in mortgage-backed debt from existing holdings, promises to absorb roughly 80% of new debt from Fannie, Freddie and Ginnie based on recent levels of issuance.

"High-quality paper is getting harder and harder to come by," said Robert Smith, chief investment officer at Sage Advisory Services in Austin, Texas. "In the absence of yield in traditional, secure products, money will have to go to riskier assets."

Now, with QE3, investors seeking yield have little choice but to turn to the corporate sector, whether it is bonds or stocks.

Individual investors, meanwhile, "are practically walking around in a daze; they don't know what to do," Mr. Smith said. "There is no safe yield out there, so they are redefining what is safe, which is a dangerous thing to do."

The degree to which the Fed's actions are forcing investors to change their behavior has been especially clear in the market for high-yield corporate debt, said Edward Marrinan, head of macro credit strategy at Royal Bank of Scotland.

Traditionally, high-yield investors have "drawn a fairly hard floor" and won't accept bonds with an interest rate of less than 7%, said Mr. Marrinan. But now, even with yields in the market at about 6.1%, "there doesn't appear to be any slowing of interest."

Mr. Marrinan said central-bank action world-wide is driving new kinds of investors to the U.S. corporate-bond market. Non-U.S. investors "are flocking to our markets," said Mr. Marrinan.

Ultimately, many investors are skeptical that the Fed's move will have a lasting impact on the markets unless there is evidence that the economy itself is going to improve as a result of its actions. "He'll continue to pound away, and that's a part of the rally, but there's a limit to everything," said Henry Herrmann, chief executive of asset manager Waddell & Reed, which manages about $90 billion in assets.

—Matt Phillips contributed to this article.

Write to Tom Lauricella at and Jonathan Cheng at

Corrections & Amplifications
The surname of Edward Marrinan, head of macro credit strategy at Royal Bank of Scotland, was misspelled as Marriman in an earlier version of this article.