Cost of Money Falls in U.S. Shutdown’s Second Day: Reality Check

The cost of money in U.S. markets fell as the first government shutdown in 17 years entered a second day with President Barack Obama summoning the top four leaders of Congress to the White House.

The Bloomberg U.S. Financial Conditions Index (BFCIUS) was little changed, falling 0.1 to 1.3 after increasing 0.1 yesterday. 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 to as low as negative 1.631.

Treasury yields fell as the U.S. government started a partial closure yesterday while lawmakers face a decision on raising the $16.7 trillion U.S. debt limit this month to ensure the government has enough money to pay all its bills. The first shutdown since 1996 may cost the U.S. at least $300 million a day in lost economic output at the start, according to forecasting firm IHS Inc. (IHS)

“The markets are trying to figure out the exact economic impact of what the government shutdown means,” Robert Schumacher, head of fixed income in the U.S. at Axa Investment Managers, said in a telephone interview. “It may come down to the eleventh hour but I have a high level of confidence that the debt ceiling gets resolved.”

Obama invited House Speaker John Boehner, Senate Majority Leader Harry Reid, Senate Minority Leader Mitch McConnell and House Minority Leader Nancy Pelosi for the first high-level talks on reopening the government and raising the debt ceiling, a White House official said on condition of anonymity.

Treasuries

The yield on the benchmark 10-year U.S. Treasury note fell 3 basis points, or 0.03 percentage point, to 2.62 percent at 4:59 p.m. in New York, Bloomberg Bond Trader prices show. The yield is down from this year’s high of 3 percent on Sept. 6 and compares with an average of 3.52 percent over the past decade.

Rate Derivatives

The U.S. two-year interest-rate swap spread, a measure of debt market stress, rose 0.44 basis point to 13.88 basis points. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as company debentures.

Credit

A gauge of U.S. company credit risk held. 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, increased 0.2 basis point to a mid-price of 79.6 basis points, prices compiled by Bloomberg show. The index, which typically climbs as investor confidence in credit deteriorates and falls as it improves, has averaged 81.8 basis points this year.

Currencies

The Bloomberg U.S. Dollar Index, which tracks the performance of a basket of 10 leading global currencies against the dollar, dropped 0.3 percent to 1,008.50 in New York. The index has traded in a range of 1,008.4 and 1,054.48 the past three months. The greenback held at $1.3581. The yen was little changed at 97.37 per dollar.

Stocks

The Standard & Poor’s 500 fell 0.1 percent to 1,693.87 in New York, after rising 0.8 percent yesterday. The Dow Jones Industrial Average dropped 0.39 percent, to 15,133.14.

Volatility

The CBOE Volatility Index (VIX), or VIX, gained 6.82 percent to 16.6, 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 fell to 82.15 today, compared with the 69.12 average for the past year.

Energy, Commodities

West Texas Intermediate crude oil for November delivery rose $2.06 to $104.10 a barrel on the New York Mercantile Exchange. WTI decreased 0.3 percent yesterday to the lowest close since July 3. Prices increased 6 percent last quarter.

Gold futures for December delivery rose 2.7 percent to $1,321 an ounce on the Comex. Gold prices have tumbled 21 percent this year, heading for the first annual loss since 2000.

Copper futures for delivery in December gained 1.3 percent to $3.32 a pound on the Comex in New York.

To contact the reporter on this story: Richard Bravo in New York at rbravo5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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