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Stocks, Treasuries Retreat as Lawmakers Push Rival Debt Plans

U.S. Treasury Secretary Timothy F. Geithner
U.S. Treasury Secretary Timothy F. Geithner said he hopes lawmakers can agree on the framework of a debt-limit agreement because the House of Representatives must start deliberations July 25 to meet the Aug. 2 deadline. Photographer: Andrew Harrer/Bloomberg

U.S. stocks fell, pulling the Standard & Poor’s 500 Index down from a two-week high, and Treasuries and commodities declined as a political stalemate over raising the federal debt ceiling intensified.

The S&P 500 slipped 0.6 percent to 1,337.43 at 4 p.m. in New York after losing as much as 1 percent. The 30-year Treasury yield rose six basis points to 4.32 percent. Oil lost 0.7 percent, retreating for the first time in five days. The Dollar Index was little changed and gold and the Swiss franc touched records. Greece’s 10-year bond halted a four-day gain as Moody’s Investors Service cut the nation’s rating by three levels.

The S&P 500 pared its loss to less than 0.1 percent in early afternoon trading amid optimism lawmakers will reach a compromise, then resumed its decline as Senator Charles Schumer’s criticism of a deficit plan by House Speaker John Boehner fueled concern the two sides were still far apart. Republicans and Democrats are pressing ahead with dueling plans for raising the debt ceiling amid a fight over how to shrink the nation’s $14.3 trillion debt and quell market concerns about a potential default Aug. 2.

“Without this being resolved, in general, it holds back our economy,” Constance Hunter, chief economist at Aladdin Capital Management in Stamford, Connecticut, said in a telephone interview. Aladdin oversees $12 billion. “The lack of clarity about our fiscal situation is very problematic for business.”

Dow Leaders

Travelers Cos. and Boeing Co. lost more than 1.6 percent to lead declines among 26 of 30 stocks in the Dow Jones Industrial Average. Financial shares in the S&P 500 slipped 0.8 percent as a group and contributed the most to the index’s decline among the 10 main industries. Kimberly-Clark Corp. fell 2.1 percent after reporting a decline in second-quarter profit, hurt by higher costs for commodities. E*Trade Financial Corp. rallied 5.6 percent after hiring Morgan Stanley to explore a sale.

The S&P retreated after rising last week to within 1.4 percent of a three-year high. The index closed at 1,345.02 on July 22. When the measure climbed to 1,363.61 on April 29, it was the highest level since June 2008. The gauge rallied last week as Europe pledged support for Greece to end the region’s debt crisis and companies from Apple Inc. to Morgan Stanley beat analysts’ earnings projections.

Negotiations in Washington over the nation’s debt limit have whipsawed U.S. stocks. The S&P 500 jumped 1.6 percent on July 19, the biggest gain since March, amid optimism that President Barack Obama and congressional Republicans would agree to raise the ceiling. Stocks fell the next day amid concern a Senate plan to help the nation avoid default faced resistance from House Republicans.

Default Swaps

The cost of insuring U.S. debt rose, sending credit-default swaps on Treasuries up three basis points to 56.15, approaching the highest in 17 months, according to CMA.

Two-year Treasury yields increased two basis points to 0.42 percent and 10-year yields added four points to 3.01 percent.

“You’d think in the longer run that if there’s something truly catastrophic kind of on the horizon, or truly a market changing event, that we’d see a bigger move than we’ve seen,” Guy Lebas, the chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in a Bloomberg Television interview. “The U.S. bond markets, and Treasuries in particular, have proven remarkably resilient in the face of all these risk factors, most of them coming out of Washington.”

Debt Debate

The government can avoid a default for at least a month after the Aug. 2 deadline set by the Treasury Department, said John Silvia, chief economist at Wells Fargo Securities LLC. The Federal Reserve and the Treasury can work together to generate enough cash for two or three months, Silvia, who is based in Charlotte, North Carolina, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu.

House Speaker John Boehner’s two-step debt-limit plan would raise the U.S. borrowing limit by up to $1 trillion and later by about $1.6 trillion while requiring larger spending cuts, according to Republican aides. The plan would require $1.2 trillion in spending cuts in the first phase and up to $1.8 trillion in the second step, the aides said. Congress would be required to vote by the end of this year on a constitutional amendment for a balanced budget, one aide said.

‘Far From Perfect’

“This plan is far from perfect, but it adheres to our principles of ensuring that spending cuts are greater than any debt hike and it includes no tax increases,” Boehner, an Ohio Republican, said in a statement.

Senate Majority Leader Harry Reid, a Nevada Democrat, prepared his own proposal, which would hand Obama the full $2.4 trillion in additional borrowing authority he seeks -- enough to last through the 2012 elections -- tied to $2.7 trillion in spending cuts that would leave Medicare and Medicaid untouched, said a Senate Democratic aide.

“This is an offer that the Republicans can’t refuse, all of the cuts in Senator Reid’s proposal have been supported at one point or another by Republicans,” Schumer, the New York Democrat, said at a news conference in Washington today. “If they refuse this offer, it simply means they want to default, for whatever reason.”

Overseas, the Stoxx Europe 600 Index fell 0.3 percent, halting a four-day rally. Banks led losses, with Intesa Sanpaolo SpA, Italy’s second-biggest lender, dropping more than 8 percent.

Greece’s 10-year yield climbed 11 basis points, or 0.11 percentage point, to 14.79 after retreating from a high of 18.2 percent on July 18. Greece’s credit rating was cut three steps by Moody’s Investors Service, which said the European Union’s rescue for the nation will cause “substantial” losses for investors.

Franc Rallies

The Swiss franc strengthened against all 16 major peers, gaining 1.6 percent against the 17-nation euro and rallying as much as 2.1 percent to a record $1.2467. The Dollar Index, which tracks the currency against those of six trading partners, slipped 0.1 percent. The euro dropped 0.2 percent against the yen.

The Shanghai Composite Index tumbled 3 percent, the most in six months, and the MSCI Emerging Markets Index retreated 0.4 percent. CSR Corp. and China CNR Corp., China’s biggest train makers, led losses in Shanghai after a weekend collision killed at least 36 people and prompted the government to order a rail-safety inspection.

The Turkish lira weakened 1.2 percent against the dollar on growing concern that the country’s record current-account deficit may leave it vulnerable to a drop in risk appetite. The lira pared an early decline of as much as 2.2 percent after the central bank said it suspended daily dollar purchases.

Cocoa, sugar and cotton dropped at least 1.9 percent to lead declines in 18 of 24 commodities tracked by the S&P GSCI Index, which lost 0.6 percent. Corn and soybean futures slumped at least 1.2 percent, the most in three weeks, amid speculation that rain and cooler weather will bolster crop development in the U.S., the world’s biggest producer.

Gold for immediate delivery rose for a second day, rising as much as 1.4 percent to a record $1,624.07 an ounce. Crude oil for September delivery retreated 0.7 percent to $99.20 a barrel on the New York Mercantile Exchange, following four weeks of gains.

Download: Rogers Remains Bullish on Gold and Buys More


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