The Clinton Herald, Clinton, Iowa

October 10, 2013

Investors keep faith in U.S. in crisis after crisis

BERNARD CONDON AP Business Writer
The Clinton Herald

---- — NEW YORK — Global investors have stayed remarkably confident in the U.S. despite one budget crisis after another. But they’re starting to wonder if the latest political impasse will tarnish America’s Teflon image.

So far, the nation’s reputation as the world’s best place to invest remains unshaken. The 10-year Treasury note, the bedrock of the government’s debt market, has attracted more money in recent weeks, not less, and the stock market is still close to record highs.

Still, the squabbling in Washington over the debt ceiling, which follows squabbling over automatic spending cuts earlier this year, is severely testing investor patience. Many fear a default would be a tipping point, sending bond and stock prices plunging.

The repeated budgetary brinkmanship is making some question their faith in the U.S.

“The more times you give politicians a chance to completely muck something up, the more chance ... they will do it,” says Gary Jenkins, managing director of Swordfish Research in London. “If this were to become a regular occurrence, then, who knows?”

The U.S. Treasury has warned it will run out of money if Congress does not agree to raise a $16.7 trillion cap on borrowing by Oct. 17 and allow it to issue more debt. That has raised the specter that the U.S. won’t be able to pay interest on its debt. Republicans say they won’t allow more borrowing unless Democrats agree to restructure benefits programs or cut the deficit; the White House has ruled out negotiations tied to the debt cap.

The Treasury says a default on bond payments could freeze global credit, spike borrowing costs and trigger a collapse worse than the Great Recession.

Even with such a dire scenario, investors continue to buy Treasurys. On Tuesday, the yield on the 10-year note, which falls when investors buy, was 2.63 percent, near a two-month low.

U.S. stocks fell again on Tuesday, the 11th drop in the last 14 trading days. Still, the Standard and Poor’s 500 index reached an all-time high just three weeks ago and is only 4 percent below that peak.

The debt ceiling fight echoes the Congressional standoff over the same issue in the summer of 2011.

Experts say the U.S. attracts money now for the same reason it did back then: Many other countries are faring worse than the U.S. China, India and Brazil are slowing dramatically. Japan is struggling to shake off a two-decade slump. The 17 countries of the eurozone have just emerged from a recession.

“We’re the best of worst,” says David Sherman, head of Cohanzick Management, a manager of bond funds. He adds that the U.S. tends to “bounce back” from crises.

In the 2011 crisis, for example, U.S. stock prices dropped, but recovered most of their losses by the end of the year.

Many investors think the costs of a default are too high for politicians not to raise the borrowing cap before the deadline. But they’re still worried. Congress hasn’t agreed on a spending bill for the new budget year that began Oct. 1. A lack of funding led to a partial shutdown of the government, which entered its ninth day on Wednesday.

“If we’re having trouble with this government shutdown, and no negotiation, what’s going to happen in two weeks?” asks Talley Leger, a strategist Macro Vision Research, an investment consultancy.