Treasury Bill Rates Jump, Internet Stocks Fall on Budget

Risk appetites in American capital markets diminished amid the U.S. budget impasse, pushing Treasury one-month bill rates to the highest since 2008 and Internet stocks to the biggest losses in two years.

Rates on one-month bills more than doubled to 0.33 percent, the highest since October 2008, while the Standard & Poor’s 500 Index tumbled 1.2 percent to 1,655.45 at 4 p.m. in New York for its biggest drop since August and lowest close in a month. The Nasdaq Internet Index tumbled 4.1 percent, the most since November 2011, and the Chicago Board Options Exchange Volatility Index rose to the highest since June. The MSCI Emerging Markets Index added 0.2 percent, paring an earlier rally of 0.6 percent, with China’s benchmark index rising more than 1 percent as trading resumed after a holiday.

President Barack Obama said the U.S. economy risks a “very deep recession” if Congress doesn’t raise the $16.7 trillion debt ceiling. Senate Majority Leader Harry Reid said the Republican-controlled House should vote to end the government shutdown and drop demands to change the Affordable Care Act, while House Speaker John Boehner said Reid and Obama should negotiate. Alcoa Inc. posted better-than-forecast earnings after trading closed as the U.S. reporting season began.

“You’re going to see the debt-limit ceiling coming to play at the end of the week and the market could get volatile,” Bernie Williams, chief investment officer of investment solutions who oversees $16.7 billion at USAA Investments in San Antonio, said in a phone interview. “Stocks are probably the best game in town as long as we get positive earnings growth. We may get a correction here and there, but I don’t think we slide into a recession.”

Test Vote

With the U.S.’s borrowing authority set to lapse Oct. 17, Obama reiterated that he won’t negotiate with Republicans over raising the debt ceiling or reopening the government.

Senate Democrats are planning a test vote before the end of this week on a measure that would grant Obama authority to raise the debt ceiling, probably for a year unless two-thirds of both chambers of Congress disapprove. China and Japan, which together hold more than $2.4 trillion in Treasuries, raised pressure on the U.S. to resolve the political impasse.

The International Monetary Fund cut its global outlook for this year and next as capital outflows further weaken emerging markets and warned that a U.S. government default could “seriously damage” the world economy.

Global Growth

Global growth worldwide will be 2.9 percent this year and 3.6 percent next year, the IMF said in a report today, compared with July predictions of 3.1 percent for 2013 and 3.8 percent for 2014. It sees emerging economies growing 4.5 percent this year, 0.5 percentage point less than three months ago, as projections were reduced for China, Mexico, India and Russia.

Treasury one-month bill rates surged 17 basis points to 0.33 percent. The Treasury sold $30 billion of one-month bills today at a rate of 0.35 percent, the highest since 2008. Rates on Treasury bills due on Oct. 24 climbed to the highest since they were issued in April after being negative as recently as Sept. 27.

Yields on three-year notes rose four basis points to 0.68 percent as the U.S. sold $30 billion of the debt in the first auction of coupon securities since the government shutdown.

“This uncertainty in Washington is causing troubles in the market, mostly in the front end, on whether issues maturing around that time will be paid off,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers obligated to bid at Treasury auctions. “The three-year sector has gotten cheaper as the week has gone on.”

Yield Watch

While rates more than doubled on one-month bills, today’s increase pales in comparison with historical moves. Rates surged 39 basis points to 0.45 percent on Oct. 21, 2008, when the Fed invoked emergency authority and agreed to provide up to $540 billion in loans to help relieve pressure on money-market mutual funds beset by redemptions.

One-month bill rates averaged 2.47 percent in the decade before the Fed reduced its target rate for overnight loans between banks to a range of zero to 0.25 percent in December 2008.

The S&P 500 has tumbled 2.1 percent this week, its biggest two-day loss since June. Alcoa, the largest American aluminum producer, jumped 1.9 percent in extended trading at 4:16 p.m. New York time. The company reported adjusted earnings of 11 cents a share, topping the average estimate of analysts for 5 cents, amid higher profit from a division that turns the metal into auto and aerospace parts. JPMorgan Chase & Co. and Wells Fargo & Co. will also report this week.

Earnings Season

Profits for the S&P 500 probably increased 1.7 percent during the third quarter while sales rose 2.2 percent, according to analysts’ estimates compiled by Bloomberg. Analysts anticipate earnings growth to accelerate to 8.9 percent in the final three months of the year, the data show.

Facebook Inc. and TripAdvisor Inc. dropped 6.7 percent and 5.5 percent respectively in regular trading. The Nasdaq Internet Index tumbled 4.1 percent, its biggest decline since November 2011, as all 81 of its companies dropped. The gauge had surged 49 percent this year through yesterday, almost triple the gain in the S&P 500.

“Investors are locking in gains on any stocks that have dramatically outperformed this year,” Ian Winer, director of equity trading at Wedbush Securities Inc., said in an interview. “I just think guys are looking at their portfolios and saying, ‘These are up huge, maybe I sell some to lock in some gains and revisit post debt-ceiling resolution.’”

U.S. Movers

Xerox Corp. slid 2.5 percent after announcing the U.S. has been probing the accounting practices of its outsourcing division. J.C. Penney & Co. climbed 0.8 percent, halting a seven-day slide and rebounding from the lowest price since 1982, as the retailer said its sales decline slowed in September.

Stocks with the highest short interest were among the market’s biggest losers. A Goldman Sachs basket of stocks with the most bearish bets against them slid 2.3 percent, paring its rally in 2013 to 35 percent.

The CBOE Volatility Index, the gauge of S&P 500 options prices known as the VIX, jumped 4.8 percent today to 20.34, the highest closing level since June 20, after a 16 percent surge yesterday.

From its intraday low of 12.52 on Sept. 30, the VIX jumped 68 percent to its highest level of today, 21.01. That’s the fifth time in 2013 that the index climbed more than 50 percent from trough to peak, according to data compiled by Bespoke Investment Group and Bloomberg. The gauge of options prices remains almost 58 percent below its 2011 high, the data show.

‘Plumbing System’

Even as the probability of a U.S. government default is “very, very small,” volatility in the markets will increase in coming days, Mohamed El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co. A U.S. default on its debt obligations would prove more unpredictable to financial markets than the 2008 collapse of Lehman Brothers Holding Inc., he said.

“What frightens us the most is what happens to the plumbing system of the global-financial system,” El-Erian said in an interview on Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene. “You will have cascading failure, multiple defaults, and Treasuries that act as collateral would be very difficult to exchange and people will simply step back. It will be like Lehman, but more unpredictable.”

‘Little Stretched’

Garry Evans, global head of equity strategy at HSBC Holdings Plc, cut his recommendation on U.S. equities to neutral from overweight, saying valuations are “a little stretched.” He advised investors to increase holdings in emerging markets because growth in China is stabilizing and stocks are cheap.

The MSCI Emerging Markets Index rose to the highest level since Sept. 24 in intraday trading before paring. India’s S&P BSE Sensex increased 0.4 percent as central bank Governor Raghuram Rajan scaled back emergency steps taken to boost the currency, cutting the marginal standing facility. Russia’s Micex Index jumped 1.7 percent.

The Shanghai Composite Index added 1.1 percent on the first day of trading after a week-long holiday and the Hang Seng China Enterprises Index in Hong Kong increased 1 percent. China’s retail and catering combined sales grew 14 percent during the holiday, according to a statement posted on the website of the Commerce Ministry. The yuan advanced by the most in almost two months as the central bank raised the currency’s reference rate to a record.

European Shares

Three shares fell for each that gained in the Stoxx 600 as trading volumes were 9.2 percent higher than the 30-day average, data compiled by Bloomberg show. German factory orders unexpectedly declined in August, a government report showed today

TGS Nopec Geophysical ASA tumbled 15 percent as Norway’s largest surveyor of underwater oil and gas fields cut its revenue forecast. Rival Petroleum Geo-Services ASA slid 7.5 percent. Getinge AB retreated 10 percent as the Swedish maker of sterilization systems said third-quarter profit missed analysts’ estimates.

Banca Monte dei Paschi di Siena SpA, Italy’s third-biggest bank, rose 1.7 percent after pledging to cut an additional 3,360 jobs and increase capital to win support from the European Union for 4.1 billion euros ($5.6 billion) in state aid.

Global Bonds

Spanish bonds declined for a second day as the Financial Times reported that the European Banking Authority may penalize banks that rely on cash from the European Central Bank’s longer-term refinancing operations for funding. The 10-year yield rose nine basis points to 4.30 percent while the rate on similar-maturity Italian debt climbed five basis points to 4.35 percent.

Bonds extended declines after Spain said it planned to sell a new bond maturing in 2044 via banks in the near future and Italy’s Finance Ministry said it planned to offer a seven-year note via banks.

Japan must consider the impact of any default on its bond holdings, even as the U.S. will probably avoid a fiscal crisis, Japanese Finance Minister Taro Aso said today in Tokyo. Chinese Deputy Finance Minister Zhu Guangyao said yesterday that the U.S. should prevent a default, the People’s Daily reported.

The yen weakened against 13 of its 16 major peers after reaching 96.57 per dollar earlier today, its strongest level since August. The Japanese currency dropped most against the currencies of Taiwan, South Africa and Australia. It fell 0.2 percent to 131.64 per euro.

Implied volatility on the dollar against the yen fell to a nine-month low, a sign investors are confident in a resolution to U.S. debt-ceiling talks, according to Westpac Banking Corp. One-week implied volatility was at 9.40 percent, the lowest since Jan. 8. It’s averaged 13.3 percent this year.

The S&P GSCI gauge of 24 commodities advanced 0.4 percent. WTI oil rose 0.5 percent to $103.49 a barrel. Gold for December delivery slipped less than 0.1 percent at $1,324.60 an ounce after retreating more than 0.7 percent earlier.

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