Stocks drop on U.S. government shutdown as yen, Treasuries gain

Default Swaps

The cost of insuring against losses on Treasuries fell, with credit-default swaps linked to U.S. government debt rose two basis points to 35.42 basis points, the highest since April. That compares with a peak of 56 basis points in July 2011, when a political standoff threatened to shutter programs and delay bond payments.

Strategists from Bank of America Corp. to Wells Fargo & Co. predict dollar-denominated corporate bonds will outperform stocks this month if political gridlock persists with the government partially shut down this week.

Company debt in the U.S. has gained 1.1% since Sept. 17, the day before the Federal Reserve surprised investors with its decision to maintain unprecedented economic stimulus, compared with a 0.5% decline on the S&P 500. In August 2011, the last time legislators approached a deadline to raise the debt limit, investment grade bonds returned 0.13% while U.S. stocks declined 5.4%.


The amount of debt protected by default swaps has fallen to $3.4 billion dollars from $5.6 billion two years ago and compares with $13 billion of outstanding insurance on German bunds. There are 886 credit-default swaps contracts linked to U.S debt outstanding, according to the Depository Trust & Clearing Corp. There were 56 trades covering a gross $2.1 billion of Treasuries in the week through Sept. 27, compared with 10 trades the week before.

Italy’s 10-year bond yield fell five basis points to 4.37%. Italian notes gained as Silvio Berlusconi said he’ll back Prime Minister Enrico Letta’s government.The yield on similar-maturity Portuguese notes jumped 18 basis points to 6.77%.

The yen appreciated for a second day, gaining 0.5% to 97.51 per dollar, while the euro gained 0.4% to $1.3582 after European Central Bank President Mario Draghi said the bank is attentive to exchange-rate developments.

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