Conditions Highest Since August on Deal Optimism: Reality Check

Financial conditions improved to the strongest level since August as Republican and Democratic congressional leaders worked on a short-term budget agreement that diminishes the risk of a government debt default next week.

The Bloomberg U.S. Financial Conditions Index (BFCIUS) rose 0.07 to 1.467, the strongest level since Aug. 13. 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.

“It seems there is progress being made toward resolution and the risk of default on the part of the U.S. Treasury has eased, or at least postponed,” said Christopher Sullivan, who oversees $2.25 billion as chief investment officer at the United Nations Federal Credit Union in New York. “Although there is still uncertainty about the process, there is optimism that the political fears will give way to some type of agreement.”

House Republicans offered a plan to raise the U.S. debt limit and end a partial government shutdown that would require the President Barack Obama to accept policy conditions attached to a spending measure, said two congressional aides.

Republicans sent a list of policy options to the White House following a meeting yesterday, said the aides, who spoke on condition of anonymity. Obama has insisted that he won’t accept conditions for ending the shutdown, which is in its 11th day.

Treasury Secretary Jacob J. Lew said before Congress yesterday that the U.S. needs to boost the debt limit by Oct. 17 or risk defaulting on its payments.

Treasuries

Rates on debt due on Nov. 29 rose four basis points, or 0.04 percentage point, to 0.16 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader prices, after adding eight basis points yesterday. They were negative Sept. 26.

The rate on $120 billion in bills due Oct. 17 dropped 11 basis points to 0.20 percent after touching 0.51 percent yesterday. The rate on $93 billion in bills due Oct. 24 fell five basis points to 0.26 percent after climbing as high as 0.50 percent yesterday.

Treasury 10-year note yields rose one basis point to 2.69 percent, raising a weekly increase to four basis points. The price of the 2.5 percent security due in August 2023 fell 1/32, or 31 cents per $1,000 face value, to 98 12/32.

Rate Derivatives

The U.S. two-year interest-rate swap spread, a measure of debt-market stress, fell 0.75 basis point to 12.63 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 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, fell 4.8 basis points to a mid-price of 78.74 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, fell 0.1 percent to 1,012.38. The index has traded in a range of 1,007.9 and 1,038.63 the past three months. The greenback gained 0.4 percent to 98.58 yen. The Japanese currency weakened 0.6 percent to 133.51 per euro.

Stocks

The Standard & Poor’s 500 increased 0.6 percent to 1,703.20, erasing losses since the start of the government’s partial shutdown that began Oct. 1. The Dow Jones Industrial Average climbed 111.04 points, or 0.7 percent, to 15,237.11.

Volatility

The CBOE Volatility Index (VIX), or VIX, fell 4.6 percent to 15.72, after approaching its closing high for the year of 20.49 in June and compared with a low of 11.3 in March. Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index fell to 80.08 yesterday, compared with the average this year is 72.3.

Currency swings as measured by the JPMorgan Global Volatility Index fell for a second day to 8.41, versus a 2013 average of 9.38.

Energy, Commodities

West Texas Intermediate crude oil for November delivery slid $1.24, or 1.2 percent, to $101.77 a barrel on the New York Mercantile Exchange.

Gold futures for December delivery fell 1.9 percent to $1,272.10 an ounce on the Comex in New York. Prices dropped 2.9 percent this week amid speculation that the Federal shutdown that has furloughed 800,000 workers would be short-lived.

Copper futures for delivery in December rose 0.7 percent to $3.2725 a pound on the Comex in New York.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

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

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