Stocks, Six-Month Bills Decline as U.S. Moves Closer to Default

U.S. Speaker of the House John Boehner
U.S. Speaker of the House John Boehner. Photographer: Win McNamee/Getty Images

U.S. stocks slid, dragging the Standard & Poor’s 500 Index lower for a fourth day, and six-month Treasury bills sank as lawmakers indicated they were no closer to an agreement to raise the debt ceiling. The dollar gained and commodities retreated.

The S&P 500 slipped 0.3 percent to 1,300.67 at 4 p.m. in New York to extend this week’s loss to 3.3 percent. Futures on the index fell 0.2 percent at 6:31 p.m. after House Speaker John Boehner delayed a vote on debt-limit legislation. The drop in Treasury bills issued in February that mature just after the U.S. exhausts the ability to borrow on Aug. 2 sent the yield up four basis points to 0.15 percent. The Dollar Index rose 0.2 percent. The S&P GSCI Index of commodities fell 0.2 percent.

Stocks erased an early rally spurred by a drop in jobless claims as Senate Majority Leader Harry Reid vowed to defeat a Republican debt-ceiling plan in his chamber if it passes the House later today. Boehner postponed the vote, which had been scheduled for 6 p.m. in Washington.

“The market is driven by headlines as investors get increasingly nervous the closer we get to the deadline without some kind of clarity,” Carlo Panaccione, who oversees about $350 million as the co-founder of Navigation Group in Redwood Shores, California, said in a telephone interview. “There can be multiple reasons for Boehner postponing this vote, but people will fill in the blanks with the worst news.”

Blankfein, Dimon

Bankers including Goldman Sachs Group Inc. Chairman and Chief Executive Officer Lloyd Blankfein and JPMorgan Chase & Co.’s Jamie Dimon called on President Barack Obama and Congress to raise the federal debt limit to steer the government away from the threat of default.

Stocks and Treasuries have moved in tandem twice as often as they normally do, a sign investors are growing convinced the U.S. will lose its AAA credit rating and that an impasse among lawmakers may spur losses in both markets.

The S&P 500 had risen or fallen together with 10-year Treasury notes 80 percent of the time in the previous 10 days, compared with the average since 2000 of 41 percent, according to data compiled by Bloomberg. The 10-year note rose today, pushing the yield down three basis points to 2.96 percent, amid concern the political deadlock will damage the economy.

Treasury Secretary Timothy F. Geithner has repeatedly said the government’s authority to borrow will run out on Aug. 2 unless Congress raises the $14.3 trillion debt ceiling. A Treasury official said in an e-mail earlier today the department would provide more information on how the government would operate in the absence of borrowing authority no earlier than after financial markets close tomorrow.

Six-Month Bills

Rates on six-month bills maturing Aug. 4 retreated from their session high of 0.20 percent after an administration official said the Treasury will give priority to making interest payments to investors if lawmakers fail to reach an agreement.

Costs to protect U.S. debt from default rose for a fourth straight day, with credit-default swaps climbing two basis points to 64 points, the highest since February 8, 2010, according to data provider CMA.

Passage of Boehner’s measure to cut the deficit and raise the borrowing limit, which all 51 Senate Democrats and two independents oppose, will lead to negotiations among leaders on both sides in an attempt to avert a U.S. default.

Most Since June

The S&P 500 tumbled 2 percent yesterday, its biggest loss since June 1, and has declined 3.2 percent since July 8, the day before Alcoa Inc. unofficially started the earnings season on July 11. Stocks retreated even as almost four companies beat analyst estimates for every one that missed, according to data compiled by Bloomberg. In Europe’s Stoxx 600, more companies have trailed projections than surprised positively.

Stocks started the session higher today after jobless claims fell by 24,000 to 398,000 in the week ended July 23, fewer than forecast, Labor Department figures showed. The median estimate of economists in a Bloomberg News survey called for a drop to 415,000.

Equities headed lower amid fading optimism that lawmakers will reach a compromise agreement. AT&T Inc. led losses in the Dow Jones Industrial Average, dropping 2.3 percent. Exxon Mobil Corp. fell 2.2 percent after reporting second-quarter profit trailed estimates. Cisco Systems Inc. rallied 2 percent to lead gains in the Dow after Goldman Sachs advised buying the shares.

Federal Reserve Bank of San Francisco President John C. Williams said in the text of a speech that the central bank doesn’t have a “magic wand” to help the economy if the U.S. government defaults on its debts.

‘Very Grave’

Executives wrote in a letter sent today by the Financial Services Forum, a Washington-based trade group representing the largest banks, that the consequences of a default would be “very grave.”

“A default on our Nation’s obligations, or a downgrade of America’s credit rating, would be a tremendous blow to business and investor confidence -- raising interest rates for everyone who borrows, undermining the value of the Dollar, and roiling stock and bond markets -- and, therefore, dramatically worsening our Nation’s already difficult economic circumstances,” the group wrote in the letter to the U.S. Congress and the White House.

Among European shares, Credit Suisse Group AG, Switzerland’s second-biggest bank, lost 1.6 percent after second-quarter profit fell 52 percent, and BASF SE, the world’s largest chemical company, sank 4.2 percent after signaling growth will slow. Air France-KLM Group and Deutsche Lufthansa AG, Europe’s biggest airlines, fell more than 2.8 percent as earnings missed estimates.

Italian Bonds

Italy’s 10-year bond yield rose six basis points to 5.80 percent. The nation sold almost 2.7 billion euros ($3.9 billion) of 10-year bonds at an average yield of 5.77 percent, compared with 4.94 percent at an auction June 28. The Spanish 10-year yield increased six basis points to 5.98 percent. The Greek two-year note yield jumped 11 basis points to 30.13 percent.

The MSCI Emerging Markets Index slipped 0.4 percent, led by declines in Asian exporters including Taiwan’s HTC Corp. and South Korea’s Samsung Electronics Co. Turkey’s lira strengthened 0.9 percent against the dollar and the country’s ISE National 100 Index advanced 2.2 percent, the most in two months, after central bank Governor Erdem Basci said the Turkish currency isn’t overvalued.

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