Treasuries, Dollar Drop as Moody’s Raises Concern on U.S. Debt

U.S. Treasury Secretary Timothy F. Geithner
Timothy F. Geithner, U.S. Treasury secretary, has warned that a failure to raise the debt ceiling by Aug. 2, the date he now projects borrowing authority would be exhausted, may have catastrophic effects on the U.S. economy by sharply raising borrowing costs. Photographer: Peter Foley/Bloomberg

U.S. Treasuries and the dollar fell as Moody’s Investors Service said it may put the government’s Aaa credit rating on review for a downgrade if there is no agreement on the debt-limit debate. Stocks fell, building on the biggest Standard & Poor’s 500 Index retreat since August.

Yields on 10-year Treasuries climbed to 3.04 percent at 4 p.m. in New York, from 3.01 percent before the Moody’s announcement and a six-month low of 2.94 percent yesterday. The euro climbed as much as 1.3 percent to $1.4514, the strongest level since May 6. The S&P 500, which tumbled 2.3 percent yesterday amid concern the economic recovery is faltering, lost 0.1 percent to 1,312.94.

Treasury prices and the dollar extended losses after Moody’s said it expects to place the U.S. rating on review if no progress is made on increasing the government’s debt limit in coming weeks. The Aaa rating will be kept if the threshold is increased, and a “credible agreement” on substantial deficit cuts would support a continued stable outlook, Moody’s said.

“In this event you wouldn’t expect it to be a real default, but a political or technical default,” said Brett Rose, interest-rate strategist at Citigroup Global Markets in New York. “The worst case could still be bad. You could still see a 50 basis point move in rates because of a technical default, but many would see that as a buying opportunity.”

Debt Ceiling

Two-year Treasury yields climbed three basis points to 0.46 percent and the rate on the 30-year bond jumped 11 basis points to 4.25 percent. The Dollar Index, a gauge of the currency against six major peers, lost 0.5 percent to 74.305.

A bill that would raise the U.S. debt limit by $2.4 trillion failed to win House passage May 31 in a vote Democrats said was rigged to ensure its defeat. In April, S&P put the U.S. government on notice that it risks losing its AAA credit rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt.

Republicans who control the House of Representatives announced the vote last week as a way to demonstrate that lawmakers don’t support extending the $14.3 trillion debt limit unless agreement is reached with President Barack Obama’s administration on significant spending cuts. Treasury Secretary Timothy Geithner has warned that a failure to raise the debt ceiling by Aug. 2, the date he now projects borrowing authority would be exhausted, may have catastrophic effects on the U.S. economy by sharply raising borrowing costs.

Six-Week Low

The S&P 500 remained near a six-week low as retailers fell after reporting disappointing sales and economists cut forecasts for U.S. payroll gains in May, adding to evidence the global economy is slowing amid Europe’s debt crisis and the aftermath of Japan’s worst earthquake.

Gap Inc., J.C. Penney Co. and Limited Brands Inc. lost at least 2.2 percent to pace declines in 25 of 31 stocks in the S&P 500 Retailing Index after monthly sales trailed estimates following a surge in gasoline prices.

The S&P 500 has tumbled 3.7 percent from a nearly three-year high at the end of April as data on manufacturing and housing trailed economists’ estimates and investors prepared for the Federal Reserve to complete its $600 billion bond-purchase program at the end of June.

The index started the session trading at 13.3 times the estimated 2011 earnings of its companies, Bloomberg data show.

Payrolls Report

More Americans than forecast filed applications for unemployment benefits last week, Labor Department data showed today. Tomorrow’s monthly payrolls data may show employers added 170,000 jobs in May, following a 244,000 increase in April, economists forecast. Economists predicted a gain of 185,000 before yesterday’s ADP Employer Services report showed companies added 38,000 jobs last month, less than a quarter of the median estimate in a survey of economists.

The Stoxx Europe 600 Index dropped 1.3 percent to the lowest level since April 19 as all 19 industry groups retreated. Rio Tinto Group helped lead losses among basic-resource producers, falling 2.6 percent. Kingfisher Plc, Britain’s largest home-improvement retailer, slid 1 percent after reporting earnings that missed some analysts’ estimates.

The MSCI Emerging Markets Index decreased 0.6 percent. Benchmark indexes in China, South Korea and South Africa dropped more than 1 percent.

Peru’s benchmark stock index jumped 7.2 percent, the most since 2008, after polls showed former army renegade Ollanta Humala hasn’t taken a lead over Congresswoman Keiko Fujimori in opinion polls before this weekend’s presidential runoff. The polls eased concern that Humala would be elected and increase state control over the economy.

Vietnam’s VN Index jumped 3.4 percent, the biggest gain this year, after the central bank took steps to stabilize the currency.

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