Shutdown Is Tightening U.S. Financial Conditions: Reality Check

Financial conditions tightened after the first face-to-face talks between President Barack Obama and congressional leaders failed to break the budget logjam as a partial U.S. government shutdown entered its third day.

The Bloomberg U.S. Financial Conditions Index fell to 1.23, the lowest since Sept. 3. The gauge, which is up from 0.31 at the end of 2012, 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, it fell as low as negative 1.631.

President Barack Obama urged House Speaker John Boehner to hold a vote on funding federal operations without strings attached, saying the Republican leader’s refusal to do so is the only thing standing in the way of reopening of the U.S. government. Obama also said today that if Republicans hold up raising the federal debt ceiling to press their demands it would cause “dramatically worse” consequences for the U.S. economy.

“It’s a very difficult investing environment with no resolution from Washington, and a lack of fundamental economic data to go on,” said Christopher Sullivan, who oversees $2.2 billion as chief investment officer at United Nations Federal Credit Union in New York. “Investors are increasingly staying on the sidelines and looking for safety, and the longer this thing gets drawn out, the more uncertainty we will have to contend with.”

The government’s first partial shutdown since 1996 may cost the U.S. at least $300 million a day in lost economic output at the start, according to IHS Inc. Though that’s a fraction of the country’s $15.7 trillion economy, the effects may grow over time as consumers and businesses defer purchases and expansion plans.


The yield on the benchmark 10-year U.S. Treasury note fell two basis points, or 0.02 percentage point, to 2.6 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The yield is down from the high this year of 3 percent on Sept. 6 and compares with the average of 3.52 percent during the past decade.

Rates on Treasury bills that mature Oct. 24 rose to 0.13 percent after touching negative 0.01 percent on Sept. 27. Two years ago, one-month bills climbed to a 29-month high of 0.18 percent as the Aug. 2, 2011, deadline set by Treasury to avoid a default approached.

Rate Derivatives

The U.S. two-year interest-rate swap spread, a measure of debt market stress, rose 0.44 basis point to 14.25 basis points. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as company debentures.


A gauge of U.S. company credit risk fell. The Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreasing 0.4 basis point to a mid-price of 80.9 basis points in New York, according to prices compiled by Bloomberg. The index, which typically climbs as investor confidence in credit deteriorates and falls as it improves, has ranged over the past three months from as high as 86.5 on July 5 to as low as 69.76 on Sept. 18.


The Bloomberg U.S. Dollar Index, which tracks the performance of the greenback against 10 leading global currencies, fell 0.1 percent to 1,007.87 after reaching the lowest level since Sept. 19. The index is has traded in a range of 1,006.40 and 1,056.33 the past three months.

The dollar depreciated 0.03 percent to $1.36221 per euro in New York, reaching the weakest since Feb. 4. The U.S. currency fell 0.1 percent to 97.28 yen. Japan’s currency lost 0.2 perrcent to 132.52 per euro.


The Standard & Poor’s 500 Index lost 0.9 percent to 1,6778.66 in New York. The Dow slid 136.66 points, or 0.9 percent, to 14,996.48.


The CBOE Volatility Index, or VIX, rose 6.45 percent to 17.67, below its high for the year of 20.49 in June and above the low of 11.3 in March. Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index fell to 82.15 yesterday, compared with the average for the past year is 72.1.

JPMorgan Chase & Co.’s G-7 Currency Volatility Index fell to 8.68 percent, the lowest since Sept. 18, the date on which the gauge touched a nine-month low.

Energy, Commodities

West Texas Intermediate crude oil for November delivery fell 79 cents to $102.88 a barrel on the New York Mercantile Exchange. WTI averaged $105.81 from July to September, the highest since 2008 and 12 percent more than the previous three months. Prices increased 6 percent last quarter.

Gold futures for December delivery fell 0.2 percent to $1,317.6 an ounce on the Comex. Gold prices have tumbled 21 percent this year, heading for the first annual loss since 2000.

Copper futures for delivery in December lost 3.6 percent to $3.28 a pound on the Comex in New York.

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