Investors keep faith in US in crisis after crisis

Published on NewsOK Modified: October 9, 2013 at 5:17 pm •  Published: October 9, 2013
Advertisement
;

NEW YORK (AP) — The U.S. keeps stumbling from one budget crisis to another, but the damage never sticks.

Global investors still see it as the world's best place to park their money. Even the threat of an unprecedented government default doesn't seem to have dulled the allure of Teflon America. The 10-year Treasury note, the bedrock of the government's debt market, has attracted more money in recent weeks, not less, and the stock market is still close to record highs.

Still, the squabbling in Washington over the debt ceiling, which follows squabbling over automatic spending cuts earlier this year, is severely testing investor patience. Many fear a default would be a tipping point, sending bond and stock prices plunging.

The repeated budgetary brinkmanship is making some question their faith in the U.S.

"The more times you give politicians a chance to completely muck something up, the more chance ... they will do it," says Gary Jenkins, managing director of Swordfish Research in London. "If this were to become a regular occurrence, then, who knows?"

The U.S. Treasury has warned it will run out of money if Congress does not agree to raise a $16.7 trillion cap on borrowing by Oct. 17 and allow it to issue more debt. That has raised the specter that the U.S. won't be able to pay interest on its debt. Republicans say they won't allow more borrowing unless Democrats agree to restructure benefits programs or cut the deficit; the White House has ruled out negotiations tied to the debt cap.

The Treasury says a default on bond payments could freeze global credit, spike borrowing costs and trigger a collapse worse than the Great Recession. Already, some investors have dumped short-term Treasury bills coming due around the Oct. 17 deadline for fear they won't get paid. On Wednesday, Fidelity Investments said it has sold all those bills in its money market mutual funds.

But investors continue to buy most other Treasurys. On Wednesday, the yield on the 10-year note, which falls when investors buy, was 2.67 percent, near a two-month low.

U.S. stocks have been drifting lower the past three weeks. Even so, the Standard and Poor's 500 index is just 4 percent below an all-time high reached Sept. 18.

The debt ceiling fight echoes the Congressional standoff over the same issue in the summer of 2011.

Experts say the U.S. attracts money now for the same reason it did back then: Many other countries are faring worse than the U.S. China, India and Brazil are slowing dramatically. Japan is struggling to shake off a two-decade slump. The 17 countries of the eurozone have just emerged from a recession.

"We're the best of worst," says David Sherman, head of Cohanzick Management, a manager of bond funds. He adds that the U.S. tends to "bounce back" from crises.

In the 2011 crisis, for example, U.S. stock prices dropped, but recovered most of their losses by the end of the year.

Many investors think the costs of a default are too high for politicians not to raise the borrowing cap before the deadline. But they're still worried. Congress hasn't agreed on a spending bill for the new budget year that began Oct. 1. A lack of funding led to a partial shutdown of the government, which entered its ninth day on Wednesday.

Continue reading this story on the...