Conditions Improve as Paths Emerge on Shutdown: Reality Check

Financial conditions in the U.S. improved as possible paths emerged to raising the nation’s debt ceiling and ending a partial government shutdown that stretched into nine days.

The Bloomberg U.S. Financial Conditions Index (BFCIUS) rose 0.07 to 1.22, the highest level this week, after decreasing 0.03 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.

House Republican and Senate Democratic leaders are open to a short-term increase in the debt limit, said congressional aides of both parties who spoke on condition of anonymity to discuss strategy. The steps mark the first movement toward averting a U.S. default. President Barack Obama opened the door to talks with Republicans on topics from health care to entitlement programs if they end the debt-limit impasse, and House Republicans will send a small group of negotiators to the White House tomorrow.

“The shutdown, as well as the wrangling over the debt ceiling, are both causing unnecessary harm to our economy,” Alan Krueger, a labor economist at Princeton University who served as chairman of President Barack Obama’s Council of Economic Advisers, said in an interview today on Bloomberg Television. “It would be better if cooler heads prevailed.”

Treasury Secretary Jacob J. Lew said over the weekend that Congress must boost the $16.7 trillion debt ceiling by Oct. 17 or the U.S. risks defaulting on its payments.

Treasuries

Rates surged for a second day on Treasury bills maturing on the debt-ceiling deadline. Rates on Treasury bills due on Oct. 17 climbed 20 basis points to 0.48 percent after jumping 14 basis points yesterday. They were negative as recently as Sept. 26. The securities are yielding more than the 0.177 percent yield on the one-month London interbank offered rate.

The yield on the benchmark 10-year U.S. Treasury note increased three basis points to 2.66 percent, according to Bloomberg Bond Trader prices. That’s down from the high this year of 3 percent on Sept. 6 and compares with the average of 3.53 percent during the past decade.

Rate Derivatives

The U.S. two-year interest-rate swap spread, a measure of debt-market stress, rose 0.75 basis point to 12.63 basis points. The gauge typically widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds. The measure has dropped from this year’s high of 19.55 on June 21.

Credit

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, dropped 1.1 basis points to a mid-price of 83.4 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 averaged 81.8 this year.

Currencies

The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major currencies, rose 0.3 percent to 1,013.22. The index has traded in a range of 1,007.9 and 1,053.48 the past three months. The greenback gained 0.04 percent to 97.38 yen.

Stocks

The Standard & Poor’s 500 rose 0.1 percent to 1,656.40. The Dow Jones Industrial Average gained 0.2 percent to 14,802.98.

Volatility

The CBOE Volatility Index (VIX), or VIX, fell 3.64 percent to 19.6 after approaching its closing high for the year of 20.49 in June. That compares with a low of 11.3 in March. Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index fell to 80.8 today, compared with the average this year is 72.4.

Currency swings as measured by the JPMorgan Global Volatility Index rose to 8.84 versus a 2013 average of 9.37.

Energy, Commodities

West Texas Intermediate crude oil for November delivery fell $1.88 to $101.61 a barrel on the New York Mercantile Exchange.

Gold futures for December delivery fell 1.3 percent to $1,306.90 an ounce on the Comex in New York. Prices dropped 2.1 percent last week amid speculation that the Federal shutdown that has furloughed 800,000 workers would be short-lived.

To contact the reporter on this story: Sarika Gangar in New York at sgangar@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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