Senate leaders push toward fiscal deal with House in discord

Employee Furloughs

Reid, a Nevada Democrat, and McConnell, a Kentucky Republican, temporarily suspended talks yesterday while Boehner tried and failed to marshal House Republicans behind a plan that was significantly scaled-down from demands for health-law changes that led to the U.S. government shutdown on Oct. 1.

The partial shutdown has closed national parks, slowed clinical drug trials and led to the furlough of thousands of federal workers.

Fitch Ratings yesterday put the U.S. AAA credit grade on ratings watch negative, citing the government’s inability to raise the debt ceiling in a timely manner, according to a statement after markets in New York closed.

U.S. one-month bill rates rose to the highest level since 2008 as investors prepared to bid for $68 billion of short-term debt today after three- and six-month auctions yesterday drew the weakest demand in four years.

Rates on bills maturing on Oct. 24 climbed to the highest since they were issued in April on concern the Treasury Department will have to delay repaying some of its maturing securities as lawmakers battle over raising the federal borrowing limit. According to data compiled by Bloomberg, one- month rates were 0.40% at 8:52 a.m. in New York, the highest since October 2008. The benchmark 10-year yield was little changed at 2.73%, according to Bloomberg Bond Trader data.

Futures Contracts

Standard & Poor’s 500 Index futures expiring in December rose 0.5% to 1,701.20 at 8:31 a.m. in New York. The benchmark gauge slid 0.7% yesterday after rallying 3.3% over the previous four days. Contracts on the Dow Jones Industrial Average gained 65 points, or 0.6%, to 15,181.

“If the market truly believed the U.S. will default on its obligations, we would see a more dramatic reaction from equity and bond markets,” Henk Potts, who helps oversee about $310 billion as a strategist at Barclays Wealth & Investment Management in London, said by phone today. “The great expectation is the deal will be done. If the deal is not done, however minuscule that chance that may be, it would have a devastating impact on sentiment.”

Recession Risk

Interviewed today on “CBS This Morning,” John Chambers, a managing director of sovereign ratings at Standard & Poor’s, said he estimated that every week of the shutdown would cut 0.3% of U.S. gross domestic product from the fourth-quarter output.

“If we go past the point where the government can’t borrow any more, one of two things could happen,” he said -- cutting spending other than debt service, which “would certainly put the U.S. economy in a recession,” or not paying interest or debt service, “which would probably be an event that would be much worse” than the collapse of Lehman Brothers in 2008.

Under the Senate agreement, House Republicans would get almost none of their priorities. They tried to defund or delay the health-care law, settling last month on trying to delay the requirement that individuals purchase health insurance.

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