U.S. financial conditions held at about the highest levels since before the worst financial crisis since the Great Depression as debt investors brushed off House Speaker John Boehner’s warning that America is on a “path” to defaulting on its debts.
While the Bloomberg U.S. Financial Conditions Index fell 0.07 to 1.22, that’s above the average of 1.112 this year and compares with the high in 2007 of 1.266. The gauge measures stress in the markets by combining everything from money-market rates to yields on government and corporate bonds to volatility in equities. During the debt-ceiling debate of August 2011, the index fell as low as negative 1.631.
Pacific Investment Management Co. Co-Chief Investment Officer Bill Gross and BlackRock Inc. Chairman and Chief Executive Officer Laurence D. Fink, who oversee $5.76 trillion, dismiss the possibility of a default. Boehner said that may happen if President Barack Obama doesn’t negotiate over the budget. The government stopped providing nonessential services last week after lawmakers couldn’t agree on a spending package.
“Despite the rhetoric, handwringing, name calling and finger pointing, the market believes a deal will ultimately be struck,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “The markets are on edge, are defensive and increasingly concerned, but there is still hope that we will avoid a default.”
Treasury Secretary Jacob J. Lew said Congress needs to increase the $16.7 trillion borrowing limit by Oct. 17 or the nation risks defaulting on its payments.
Investors should buy three-, four- and five-year Treasuries and inflation-protected securities, Gross said on Bloomberg Television on Oct. 1. The government shutdown will end “very rapidly,” BlackRock’s Fink said Oct. 3 at an event hosted by the UCLA Anderson School of Management in Beverly Hills, California.
The yield on the benchmark 10-year U.S. Treasury note fell 2 basis points, or 0.02 percentage point, to 2.63% at 12:25 p.m.in New York, according to Bloomberg Bond Trader prices. The yield is down from the high this year of 3% on Sept. 6 and compares with the average of 3.52% over the past decade.
The U.S. two-year interest-rate swap spread, a measure of debt-market stress, fell 0.06 basis point to 12.94 basis points. The gauge typically narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities. The measure has dropped from this year’s high of 19.55 in June on a closing basis.
A gauge of U.S. company credit risk fell. The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, climbed 0.9 basis points to a mid-price of 80.5 basis points, according to prices compiled by Bloomberg. The index, which typically climbs as investor confidence in credit deteriorates and falls as it improves, has ranged over the past three months from as high as 86.5 on July 5 to as low as 69.76 on Sept. 18.
The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major currencies, fell 0.2% to 1,008.19, the sixth decline in seven days. The index is has traded in a range of 1,008.4 and 1,054.48 the past three months. The greenback lost 0.6% to 96.92 yen, after touching 96.81, its weakest level since Aug. 12. The Japanese currency added 0.4% to 131.58 per euro.
The Standard & Poor’s 500 fell 0.6% to 1,680.39 in New York. The Dow Jones Industrial Average declined 102.34 points, or 0.7%, to 14,970.24. Trading in S&P 500 stocks was 13% below the 30-day average during this time of day.
The CBOE Volatility Index, or VIX, rose 11% to 18.58, below its high for the year of 20.49 in June and above the low of 11.3 in March. Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index rose to 82.48 on Oct. 4, compared with the average for the past year is 72.05.
Currency swings as measured by the JPMorgan Global Volatility Index fell to as low as 8.76 on Oct. 4, the least since May 9. It was 8.68 today, versus a 2013 average of 9.38.
West Texas Intermediate crude oil for November delivery fell 37 cents, or 0.4%, to $103.47 a barrel on the New York Mercantile Exchange. The volume of all futures traded was 2% above the 100-day average for the time of day. Prices climbed last week for the first time in four weeks as Karen forced production shutdown.
Gold futures for December delivery rose 1% to $1,323.10 an ounce on the Comex in New York. Prices dropped 2.1% last week amid speculation that the Federal shutdown that has furloughed 800,000 workers would be short-lived.
Copper futures for delivery in December rose 0.3% to $3.2960 a pound on the Comex in New York.