The stock market bounced to its highest close since last spring Wednesday after the Federal Reserve said it expected to keep interest rates near zero for almost three more years.
Bond yields dropped sharply, then climbed back later in the day when investors began looking more closely into the Fed's deliberations. The yield on the five-year Treasury note touched an all-time low.
The big moves in both markets came at 10:30 p.m. MST, when the Fed's monetary policy committee said it was unlikely to raise interest rates before late 2014. It had previously said it expected to keep rates low into the middle of 2013.
"Unless there is a substantial strengthening of the economy in the near term, it's a pretty good guess we will be keeping rates low for some time," Chairman Ben Bernanke told reporters.
The Fed cut rates to near zero in December 2008, during the financial crisis, and has held them there ever since. The announcement was a sign that the Fed expects the economy, which is improving, to need significant help for three more years.
The Dow Jones industrial average was down as much as 95 points in the morning and about 60 points before the Fed announcement. It shot to a gain of 103 points during the afternoon.
The Dow closed up 81.21 points, or 0.6 percent, at 12,756.96. That's the highest close since May 10. The Dow peaked for last year in April at 12,810. Before that, it had not been so high since May 2008.
In the bond market, the yield on the 10-year Treasury note was at 2.05 percent an hour before the announcement and quickly fell to 1.92, a significant move. It rose to 1.99 percent two hours later.
The bounce-back happened at about 2 p.m., when the Fed released details of how the committee voted. Six of its 17 members had favored an interest rate increase this year or next — well before late 2014 in either case.
The yield on the five-year Treasury note hit 0.76 percent, an all-time low. Bond yields fall when their prices rise.
The Fed's extension of low rates signaled that it expects inflation to stay low. Low inflation makes Treasurys more attractive by helping to maintain the value of bond owners' fixed returns. Rising prices would eat into those returns.
The announcement guaranteed that short-term loans will remain cheap, making it easier for investors to finance longer-term purchases, such as 10- and 30-year Treasurys, said John Canally, investment strategist and economist for LPL Financial.
Monetary decisions by the Fed can change the market's momentum in the short term but rarely have a longer-term impact, Canally warned.
The market changed directions after 22 of the past 24 Fed policy announcements, he said, yet the change evaporates quickly. The market essentially has an equal chance of rising or falling in the five days after Fed meetings, he said.
"It's a coin flip, really," Canally said.
Keeping rates ultra-low for a longer period increases the likelihood that the Fed will engage in more bond-buying programs to help the economy, a policy known as quantitative easing, said Anthony Chan, chief economist with JPMorgan Private Wealth Management. Those tend to boost bond prices by increasing the overall demand in the market.
Chan called the Fed's move insurance against the European debt crisis and a recession across the Atlantic Ocean. Stock buyers, he said, were happy about the prospect of low inflation and a Fed leaning toward promoting economic growth.
The promise of lower rates pushed the dollar lower against other major currencies. Low interest rates make the dollar less attractive because they reduce the returns traders get on U.S. debt and other bonds priced in dollars.
Markets had opened mostly lower on fears about Greece's slow progress in talks with bondholders aimed at reducing that nation's crushing debt load.
Technology stocks rose all morning, bucking the wider market, after Apple reported its best quarter and blew away analyst estimates because of strong holiday sales of the iPhone and iPad.
Apple once again passed Exxon Mobil as the company with the biggest market value. Wall Street was watching the results closely because they were for the company's first quarter since the death of founder Steve Jobs.
Apple stock jumped 6.3 percent, helping lift the Nasdaq composite index by 31.67 points, or 1.1 percent, to close at 2,818.31. The Nasdaq is up 8.2 percent this year, nearly twice the gain for the Dow Jones industrial average.
Netflix Inc., the DVD-by-mail and video streaming provider, jumped 13 percent in after-hours trading after reporting earnings that far exceeded Wall Street's expectations.
The Standard & Poor's 500 index rose 11.41 points, or 0.9 percent, to 1,326.06. The S&P is up 5.4 percent for the year and more than 14 percent from its Nov. 25 low.
As fears recede about Europe, big-time investors such as hedge funds will be drawn back into the market, fueling more gains, said Joe Bell, senior Equity Strategist at Schaeffer's Investment Research.
After such a strong rally, there might be a slight decline, but "overall we're bullish," Bell said.
European markets mostly closed lower. Greece wants the investors, mostly banks and hedge funds, to voluntarily write off about half their debt. Otherwise, Greece will be unable to obtain bailout cash and won't be able to pay its bills. That could set off a financial crisis similar to what happened when Lehman Brothers investment bank failed in 2008.
Adding to the gloom was a report that Britain's economy shrank by 0.2 percent in the fourth quarter.
Among the other companies making big moves after announcing earnings:
— US Airways Group Inc. jumped 17.3 percent and Delta Air Lines Inc. rose 6.2 percent. Both airlines reported profits far better than Wall Street analysts expected. The airlines raised fares during the fourth quarter while keeping costs under control. Delta also cut the number of flights it makes to keep pace with demand.
— WellPoint Inc., the nation's largest health insurance company based on enrollment, fell 4.8 percent. Its quarterly profit dropped 39 percent, far more than analysts had expected. Its full-year forecast also fell short of forecasts. Medical claims, its largest expense, rose nearly 10 percent in the quarter.
— Guidewire Software Inc. soared 37 percent on its first day of trading. The company, which makes software for the insurance industry, rose to $17.80 after selling initially at $13. The 11-year-old company raised $115 million in its debut — or about $27 million less than the profit Apple turned in an average day last quarter.
AP Business Writer Matt Craft contributed to this report from New York.
Follow Daniel Wagner at www.twitter.com/wagnerreports.