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Conditions Little Changed as Debt Deadline Looms: Reality Check

Oct. 15 (Bloomberg) -- U.S. financial conditions were little changed, hovering at the highest level in two months, as Congress worked toward an agreement to extend the government’s borrowing limit less than two days before the deadline.

The Bloomberg U.S. Financial Conditions Index increased 0.02 to 1.47, the highest 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.

The measure has risen from last week’s one-month low as the House plans to vote as soon as tonight on a bill that would prevent U.S. borrowing authority from lapsing Oct. 17 and end a 15-day government shutdown, following through on a maneuver that put Senate talks on hold. Treasury Secretary Jacob J. Lew said before Congress this month that the U.S. needs to boost the debt limit or risk defaulting on its payments.

“Most investors are trying to sit on their hands and not do anything,” Robert Grimm, the head of corporate trading at Odeon Capital Group LLC in New York, said in a telephone interview. “This is taking a lot longer and looking a lot sloppier than anybody ever expected.”

The proposal was introduced as Senate leaders closed in on an agreement. The revised House plan would extend government funding through Dec. 15, rather than Jan. 15, 2014, in the Senate plan, said Representative Devin Nunes of California, who had been meeting with leaders.

Treasuries

The rate on bills due Oct. 24 rose 20 basis points to 0.46 percent after touching 0.51 percent, the highest since the bills were sold. The rate was negative as recently as Sept. 27.

Treasury 10-year note yields rose 0.04 percentage point to 2.73 percent.

Rate Swaps

The U.S. two-year interest-rate swap spread, a measure of debt-market stress, fell 1.5 basis points to 12.25 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.

Default Swaps

A gauge of U.S. company credit risk rose. 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, climbed 0.21 basis point to a mid-price of 77 basis points, according to prices compiled by Bloomberg. The index, which typically rises as investor confidence deteriorates and falls as it improves, has averaged 81.7 this year.

Currencies

The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major currencies, rose 0.1 percent to 1,012.59. The index has traded in a range of 1,007.9 and 1,038.63 in the past three months. The greenback was little changed at 98.19 yen.

Stocks

The Standard & Poor’s 500 dropped 0.71 percent to close at 1,698.06 in New York, declining from the highest level in three weeks. The Dow Jones Industrial Average dropped 133 points, or 0.87 percent, to 15,168.01.

Volatility

The CBOE Volatility Index, or VIX, gained 16.12 percent to 18.66, below last week’s high of 20.34. Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index fell to 75.81, compared with the average this year of 72.48.

Currency swings as measured by the JPMorgan Global Volatility Index fell for a fourth day to 8.30, the lowest level since Jan. 23.

Energy, Commodities

West Texas Intermediate crude oil for November delivery slid $1.46, or 1.43 percent, to $100.95 a barrel on the New York Mercantile Exchange.

Gold futures for December delivery rose 0.39 percent to $1,281.60 an ounce on the Comex in New York.

Copper futures for delivery in December were little changed at $3.3025 a pound on the Comex in New York.

To contact the reporter on this story: Matt Robinson in New York at mrobinson55@bloomberg.net

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

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