U.S. Financial Conditions Ease on Logjam Optimism: Reality Check

Financial conditions in the U.S. rose from the lowest level in a month as a partial government shutdown entered a fourth day and optimism mounted that Washington lawmakers would reach a deal to end the budget standoff.

The Bloomberg U.S. Financial Conditions Index increased to

1.28 at 3:42 p.m. in New York after falling to 1.21 yesterday, 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.

Lawmakers continue to wrangle with the government poised to run out of borrowing authority Oct. 17. Bill Gross of Pacific Investment Management Co. and BlackRock Inc.’s Larry Fink said the deadlock over the federal budget and debt limit will be resolved soon. House Speaker John Boehner said the way to reopen the government is for Democrats to negotiate with him and accept changes to the Affordable Care Act.

“Most people in the market think that we will avoid a debt-ceiling debacle, and for good reason, because the alternative would be too awful to contemplate,” Mohamed El-Erian, chief executive and co-chief investment officer at Pimco, said today in a Bloomberg Television interview with Betty Liu. “The pressure is building, because this is not a way to run a government.”

The 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 multiply as consumers and businesses defer purchases and expansion plans.

Treasury Yields

The yield on the benchmark 10-year U.S. Treasury note rose 4 basis points, or 0.04 percentage point, to 2.65 percent at 3:42 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 3.53 percent during the past decade.

Rates on Treasury bills that mature Oct. 24 closed at 0.12 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.

Money managers are getting out of Treasuries maturing closest to the debt-ceiling deadline and buying longer-maturity bills, yields indicate. One-month rates touched 0.19 percent today, matching a 45-month high reached in November 2012, while rates on three-month bills were 0.02 percent and touched the biggest inversion of the spread since September 2008.

Rate Derivatives

The U.S. two-year interest-rate swap spread, a measure of debt market stress, fell 0.73 basis point to 13.08 basis points. The gauge narrows when investors favor assets such as company debentures and widens when they seek the perceived safety of government securities.


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, decreased 1.3 basis points to a mid-price of 79.5 basis points in New York, according to prices compiled by Bloomberg. The index, which typically falls as investor confidence in credit improves and rises as it deteriorates, has ranged over the past three months from as high as 88.2 on July 5 to as low as 68.2 on Sept. 18.


The Bloomberg U.S. Dollar Index, which tracks the performance of the greenback against 10 leading global currencies, rose 0.2 percent to 1,009.99. The index has traded in a range of 1,006.4 and 1,056.3 the past three months.

The dollar appreciated 0.47 percent to $1.3555 per euro in New York, after yesterday reaching the weakest since Feb. 4. The U.S. currency increased to 97.44 yen. Japan’s currency gained

0.29 percent to 132.07 per euro.


The Standard & Poor’s 500 Index gained 0.71 percent to 1,690.51 in New York. The Dow rose 76.1 points, or 0.51 percent, to 15,072.58.


The CBOE Volatility Index, or VIX, declined 4.3 percent to

16.91, compared with its high for the year of 20.49 in June and low of 11.3 in March. Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index fell to 80.33 yesterday, compared with the average for the past year of 69.2.

Energy, Commodities

West Texas Intermediate crude oil for November delivery rose 29 cents to $103.60 a barrel on the New York Mercantile Exchange. WTI averaged $105.81 from July through 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 0.53 percent to $1,310.60 an ounce on the Comex. Gold prices have tumbled 22 percent this year, heading for the first annual loss since 2000.

Copper futures for delivery in December gained 0.96 percent to $3.30 a pound on the Comex in New York.