Stocks & Bonds: Surge in Commodities Prices Helps End Slump on Wall St.

Mining companies and others dealing in commodities helped pull the stock market out of a three-day slump on Thursday.

News that China’s trade rebounded last month signaled the end of a six-month slowdown for the world’s biggest buyer of raw materials. The report drove prices up for copper and other commodities, and that helped lift Newmont Mining, Freeport-McMoRan and other stocks in the materials industry.

“The one thing that stands out today is the better news out of China,” said David Joy, the chief market strategist at Ameriprise Financial. “It comes as a pleasant surprise.”

The Standard & Poor’s 500-stock index edged up 6.57 points, or 0.4 percent, to 1,697.48.

The Dow Jones industrial average rose 27.65 points, or 0.2 percent, to 15,498.32. The Nasdaq composite gained 15.12 points, or 0.4 percent, to 3,669.12.

With little other news to drive trading, the stock market had meandered lower this week. The S.& P. 500 fell three days straight and remains down 0.7 percent for the week. It is still up 19 percent this year.

Brad McMillan, chief investment officer for Commonwealth Financial Network in Waltham, Mass., said a number of concerns weighed on the market this week. Comments from Federal Reserve officials have convinced many investors that the bank will begin pulling back its support for the economy in the coming months.

In an interview on CNBC after the market closed, Richard W. Fisher, head of the Fed’s Dallas branch, reaffirmed his view that it was time to wind down the bank’s stimulus effort.

At the same time, companies are warning of slower sales and turning in tepid second-quarter results. Mr. McMillan said it was starting to look as though corporate earnings had not kept up with the stock market’s strong pace this year.

“I think people are realizing that stock values are getting disconnected from earnings growth,” Mr. McMillan said. “For the rally to continue, people will have to pay more for earnings that aren’t growing that much.”

Investors are paying more for profits. A year ago, the price-earnings ratio for the S.& P. 500 was 13.4, according to the data provider FactSet. Now it is 15.6, which is still near the long-run average.

In other trading on Thursday, the better economic news out of China sent copper, widely used for electronics and to wire buildings, up 10 cents, or 3 percent, to $3.27 a pound. Gold rose $24.60, or 2 percent, to $1,309.90 an ounce.

In the bond market, the price of the 10-year Treasury note rose 10/32, to 93 1/32, while its yield fell to 2.59 percent, from 2.60 late Wednesday.

Qualified Private Activity Bonds Come Under New Scrutiny

But this valuable perk — the ability to finance a variety of business projects cheaply with bonds that are exempt from federal taxes — has not only endured, it has grown, in what amounts to a stealth subsidy for private enterprise.

A winery in North Carolina, a golf resort in Puerto Rico and a Corvette museum in Kentucky, as well as the Barclays Center in Brooklyn and the offices of both the Goldman Sachs Group and Bank of America Tower in New York — all of these projects, and many more, have been built using the tax-exempt bonds that are more conventionally used by cities and states to pay for roads, bridges and schools.

In all, more than $65 billion of these bonds have been issued by state and local governments on behalf of corporations since 2003, according to an analysis of Bloomberg bond data by The New York Times. During that period, the single biggest beneficiary of such securities was the Chevron Corporation, which last year reported a profit of $26 billion.

At a time when Washington is rent by the politics of taxes and deficits, select companies are enjoying a tax break normally reserved for public works. This style of financing, called “qualified private activity bonds,” saves businesses money, because they can borrow at relatively low interest rates. But those savings come at the expense of American taxpayers, because the interest paid to bondholders is exempt from taxes. What is more, the projects are often structured so companies can avoid paying state sales taxes on new equipment and, at times, avoid local property taxes.

Budget analysts say these bonds amount to a government subsidy, in the form of forgone tax revenue. While it is difficult to calculate the precise dollar amount of the subsidy, given the number and variety of these bonds, experts say the annual cost to federal taxpayers could run into the billions.

“The federal government doesn’t cut a check for this, but it costs the government in terms of lower tax revenue,” said Lisa Washburn, a managing director at Municipal Market Advisors, an independent municipal research firm in Concord, Mass., that assisted The Times with its analysis. “If these companies were to issue taxable bonds instead, then the federal government would receive tax revenues on them.”

Ms. Washburn added that the gain to companies, and bond buyers, can be big and long-lasting.

Chevron used most of its federally tax-free borrowings to expand a refinery in Pascagoula, Miss. Archer Daniels Midland, the agribusiness giant, used about $180 million in tax-exempt bonds to improve its grain-processing facilities in Indiana and Iowa. Alcoa raised $250 million to renovate an aluminum plant in Iowa.

Such financing arrangements are now worrying some state and local officials. Many are concerned that the budget battles in Washington will mean less federal money for them, and that the federal government might try to limit the scope of their own tax-free financing.

Some of the subsidized business projects are almost indistinguishable from public works. American Airlines, for instance, another big user of tax-exempt bonds over the last decade, used $1.3 billion of these securities to finance a new terminal at Kennedy International Airport. That terminal is owned by the City of New York; American is the builder, the borrower and a tenant.

As political controversy over the federal deficit has mounted, some fiscal experts have taken aim at this sort of tax-exempt borrowing. The team at the Bipartisan Policy Center led by Alice M. Rivlin, a former member of the Federal Reserve, and Pete V. Domenici, the former Republican senator, has called for ending it. A spokeswoman for the center said that such a change could bring in $50 billion for the federal government over 10 years.

The Obama administration would take a different approach, capping the value of the tax break that wealthy bond buyers enjoy, whether they buy private activity bonds or conventional municipal bonds. Some of the bonds in The Times’s analysis are subject to the alternative minimum tax, but taxpayers who incur the A.M.T. typically don’t buy those bonds.

It was Ms. Rivlin who, as founding director of the Congressional Budget Office, issued one of the first major reports on private activity bonds, which the report said were invented by local officials in Mississippi eager to attract business during the Great Depression. In a 1981 report, Ms. Rivlin found that the bonds were in much wider use than previously understood. Companies were using the federal subsidy to build Kmarts, McDonald’s restaurants, private golf courses and tennis clubs — even a topless bar and an adult bookstore in Philadelphia.

Big in 2012, but the Future Is Hazy for Bonds

Americans sold off their stock mutual funds, the most popular way to invest in American companies, at the fastest clip since 2008, the year the financial crisis began. That occurred despite the fact that the stock market itself rose steadily; the benchmark Standard & Poor’s 500-stock index ended the year up 13.4 percent.

Investors have been opting instead for the assumed safety of bonds. Money has been steadily flowing into mutual funds holding bonds of all sorts for the last four years, but the pace accelerated this year. The percentage of household investments in bonds shot up to 26 percent from 14 percent just five years ago, according to Morningstar.

Entering the new year, a growing number of professional investors are betting that the craze for bonds has gone too far, perhaps dangerously so, as has been evident in the headlines from the year-end reports from large investment firms. “Bond PAIN in 2013?” Wells Capital Management’s chief strategist asked. “Caution: Turn Ahead,” BlackRock analysts wrote. “The inflection year,” said Bank of America.

This is not the first time that analysts have forecast an end to the decades-long rally in bond values. But previously many of the voices predicting it were pessimists who believed that investors would sell off their bonds when they lost faith in the American government’s ability to pay back its bonds, forcing the government and many other bond issuers to pay higher interest rates. When interest rates rise, older bonds with lower interest rates are worth less.

While those previous forecasts have proved expensively wrong, this year the forecasters are being joined by many economic optimists who argue that a strengthening American economy is likely to make investors willing to embrace the risks involved in stocks, luring them out of bonds. The question, they say, is only how quickly it will happen.

“Mathematically, it’s next to impossible to get the kind of returns on bonds you’ve seen over the last few years,” said Kate Moore, the chief global equity strategist at Bank of America.

When the turn does ultimately come, it is likely to cause pain for at least some of the people who have been investing in bonds in recent years.

“You don’t want to be the last one out the door when the trends turn,” said Rebecca H. Patterson, the chief investment strategist at Bessemer Trust. “All good things come to an end and we want to make sure we’re in front of it.”

Most of the talk of investors shifting money from bonds into stocks relies first on the assumption that politicians in Washington are able to resolve the current impasse over the so-called fiscal cliff, the automatic spending cuts and tax increases that will go into effect if Congress and President Obama cannot come to an agreement, and the coming debate over the nation’s debt ceiling. If the political discord continues, it could renew investor attraction to the safety of bonds and put off any shift into stocks.

But a number of surveys suggest that professional investors are already starting to prepare for a change. Hedge funds polled by Bank of America said that they had more of their portfolio allocated to stocks than at any time since 2006.

All but one of the 13 bank strategists tracked by Birinyi Associates expects stock markets to rise in 2013. When 2012 began, the same strategists were predicting a downturn in share prices. Even among mutual fund investors, there are signs that the flows out of stocks and into bonds have been slowing down recently.

The preference for bonds has already been costly for retail investors. Over the last year, most types of American bonds have returned less than an investment in the S.&. P. 500. When inflation is factored in, the benchmark 10-year Treasury security is delivering negative returns.

But many investors are still rattled by the 2008 financial crisis and the turbulence in the stock markets since then, which have led to wild swings. Over the last five years, all major types of American bonds have done better than leading stock indexes.

The Federal Reserve has been engaged in an aggressive effort to buy bonds and drive down interest rates. The long term goal of that program is to encourage banks to lend money and to drive investors out of bonds. But in the meantime, falling interest rates have made bonds more attractive. The Fed has said it wants to keep rates low until 2015, though it could let them rise sooner if the economy picks up faster than expected. The 10-year Treasury hovered near 4 percent in recent years but has stayed below 2 percent for much of 2012.

Off the Charts: Risk Creeps Up in Long-Term Bonds

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Off the Charts: Record Lows for Sub-Investment-Grade Bonds

Or so investors seem to think.

About $79 billion in sub-investment-grade corporate bonds were issued in the quarter that just ended, Dealogic reported this week. That was the largest amount issued in any quarter since the firm began collecting the numbers in the mid-1990s.

That came as the Federal Reserve embarked on its latest effort to keep rates — both short and long term — as low as possible in an effort to stimulate the economy.

“Investors are starved for yields,” said Martin Fridson, the chief executive of FridsonVision, a research firm. “Some people say the Fed is pushing people into more risky investments.”

Sub-investment-grade bonds are traditionally known as junk bonds to their detractors and as high-yield bonds to their buyers. Neither term may be that accurate these days. The bonds have been excellent investments over the last year, but as prices have risen, the yields have fallen to record lows.

One widely followed index of the bonds, the Bank of America Merrill Lynch High Yield Master Index II, ended September with an average effective yield of 6.6 percent. That is the lowest yield in its history, as can be seen in the accompanying charts.

Of course, 6.6 percent does not look that bad today when contrasted with rates on high-quality bonds. Ten-year Treasuries offer yields of 1.6 percent, a little less than the current inflation rate. If you buy an inflation-linked 10-year Treasury — one that will protect you if inflation gets out of hand — you will lock in a real return of negative 0.86 percent. Buy a corporate bond rated Single A — a good but not great credit rating — and you can lock in a yield of around 2.4 percent.

Such low rates have proved attractive to issuers. Sales of new investment-grade corporate bonds reached $177 billion in the quarter, Dealogic reported. That was just a little lower than the figure for the first three months of this year, although it is well below the record of $271 billion issued in the first quarter of 2009.

Such heavy issuance of corporate bonds might appear to be an indication that companies are borrowing money to invest in new plants and equipment. But many of the loans are being taken out to refinance bonds issued in earlier years at higher interest rates. Such an exchange benefits the company at the expense of investors, who may end up trading in one bond for another with a lower yield.

The public demand for junk bonds appears to be high as well. EPFR Global estimated that investors put $19.3 billion into high-yield mutual funds during the third quarter. That was the second-highest amount it had calculated, trailing only the first three months of this year.

High-yield bonds can be risky as well. Their prices plunged during the recession when there were fears that many of the companies issuing such bonds would go broke. That sent yields soaring above 20 percent for a brief period.

The current strength of high-yield bonds — investors in such bonds earned a total return of about 19 percent over the last 12 months — appears to reflect a general belief that such an economic downturn is highly unlikely anytime soon.

Floyd Norris comments on finance and the economy at nytimes.com/economix.