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Investors Keep Faith in U.S. in Crisis after Crisis
By Bernard Condon, AP Business Writer
NEW YORK (AP) -- 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.
Leger thinks it may take a further drop in stocks, perhaps a big one, to force lawmakers to compromise.
The precedent for this is the 778-point drop in the Dow Jones industrial average on Sept. 29, 2008, after Congress rejected a $700 billion bailout bill, known as Troubled Asset Relief Program. The TARP bill was passed within days.
"This whole shutdown could easily drag out to the debt deadline," says Bill Strazzullo, chief market strategist of Bell Curve Trading.
His guess is that the Dow falls to 14,200 - down 576 points from Tuesday's close.
The prospects for U.S. bonds are more complicated.
When investors anticipate a crisis, they tend to buy U.S. bonds. Treasurys are one of the mostly widely held assets in the world, so it's easy to buy and sell them, even when people are panicking.
"People crave Treasurys because it is the most liquid market," says Mark Vitner, a senior economist at Wells Fargo.
After the rating agency Standard and Poor's stripped the U.S. of its top credit rating in August 2011, people bought more U.S. debt. The yield on the 10-year Treasury fell below 2 percent for the first time in a half century.
"For all its theatrical problems, the U.S. is still a haven," says Marshall Mays, director of Hong Kong-based Emerging Alpha Advisors. Mays says money should continue to flow to the U.S. from Asia.
There is another reason to buy Treasurys. The worse things get, the less likely it is that the Federal Reserve will slow its economic stimulus. The Fed is buying $85 billion in Treasury and other bonds each month, driving bond prices up and their interest rates down. The goal is to lower rates on consumer loans, which are pegged to Treasurys.
The Fed extended that program last month, partly because it though the economy still needed help. Now, with the shutdown dragging on the economy, the Fed could keep buying bonds, continuing to make them attractive investments.
Randall Warren, chief investment officer of Warren Financial Service in Exton, Penn., says the Washington standoff might not be bad for another reason.
If Americans are made aware of their large debt, he says, they may be more willing to accept an increase in taxes or a cut in spending. "The easier it will be for Congress to dish out the medicine."
A default on Treasurys would be a step too far, though, says Dariusz Kowalczyk, Hong Kong-based senior Asia economist at Credit Agricole CIB. "People would be just afraid of holding Treasurys and to a smaller degree in holding the dollar."
AP Business Writers Steve Rothwell in New York, Kelvin Chan in Hong Kong and Sarah DiLorenzo in Paris contributed to this report.
More Business News
Last Update on October 22, 2014 17:29 GMT
WASHINGTON (AP) -- U.S. consumer prices edged up slightly in September, with the overall increase held back by a third straight monthly decline in gasoline prices. The tiny gain was the latest evidence that inflation remains dormant.
The Labor Department says consumer prices rose 0.1 percent in September after having falling 0.2 percent in August. Core prices, which exclude volatile food and energy, also rose 0.1 percent after no gain in August.
Over the past 12 months, overall prices are up 1.7 percent and core prices are up a similar 1.7 percent. Both increases are well below the 2 percent target for inflation set by the Federal Reserve. The absence of inflationary pressures has allowed the central bank to keep interest rates at record lows to boost the economy.
WASHINGTON (AP) -- The government says millions of older Americans who rely on federal benefits will get a 1.7 percent increase in their monthly payments next year.
It's the third year in a row the increase will be less than 2 percent.
The annual cost-of-living adjustment affects payments for more than 70 million Social Security recipients, disabled veterans and federal retirees.
The government announced the increase Wednesday, when it released the latest measure of consumer prices. By law, the increase is based on inflation, which is well below historical averages so far this year.
Congress enacted automatic increases for Social Security beneficiaries in 1975. Until recently, the increases were rarely less than 2 percent.
AIR BAG RECALL
DETROIT (AP) -- The U.S. government is adding more than 3 million vehicles to a rare warning about faulty air bags that have the potential to kill or injure drivers or passengers in a crash.
The National Highway Traffic Safety Administration on Wednesday put out a new list of vehicles, increasing the number from 4.7 million to 7.8 million. The agency urged people to get their cars repaired if they're being recalled, especially in Florida and along the Gulf Coast.
The air bag inflators made by parts supplier Takata can rupture, causing metal fragments to fly out when the bags are inflated. Safety advocates say at least four people have died from the problem.
The warning covers many models from BMW, Chrysler, Ford, General Motors, Mazda, Honda, Mitsubishi, Nissan, Subaru and Toyota.
WASHINGTON (AP) -- Federal health officials are significantly expanding the breadth of vigilance for Ebola, saying that all travelers who come into the U.S. from Ebola-stricken West African nations will now be monitored for symptoms of illness for 21 days.
The director of the Centers for Disease Control and Prevention says the program will begin Monday and cover visitors as well as aid workers, journalists and other Americans returning from Liberia, Sierra Leone or Guinea.
The program will start in six states: New York, Pennsylvania, Maryland, Virginia, New Jersey and Georgia.
CDC Director Tom Frieden says state and local health officials will check daily for fever or other Ebola symptoms.
Passengers will get kits to help them track their temperature and will be told to inform health officials daily of their status.
J&J to spend up to $200M on Ebola vaccine program
NEW BRUNSWICK, N.J. (AP) -- Johnson & Johnson will start safety testing in early January on a vaccine combination that could protect people from a strain of the deadly Ebola virus.
The health care products maker says it has committed up to $200 million to speed up and expand production of a vaccine program being developed by its Janssen Pharmaceutical Companies.
J&J is developing the vaccine with the Danish biotech company Bavarian Nordic. It involves a regimen in which two vaccines are delivered two months apart. The combination provided complete protection in animals against a virus strain similar to the one causing the current outbreak in West Africa that has killed thousands of people.
The New Brunswick, New Jersey, company says it will also determine whether its vaccine protects against the version causing the outbreak.
MORTGAGE RISK RULES
WASHINGTON (AP) -- Federal regulators are proceeding with new rules that ease guidelines for banks selling mortgage securities and could mean fewer borrowers will need to make hefty down payments.
The Securities and Exchange Commission voted 3-2 Wednesday to adopt the rules, which six federal agencies have been working on since 2011. Three other agencies adopted the rules Tuesday, and the Federal Reserve has scheduled a vote for Wednesday afternoon.
The rules govern the amount of risk banks must take on when they package and sell mortgage securities in a multitrillion-dollar market. In the final rules, the regulators have dropped a key requirement: a 20-percent down payment from the borrower if a bank didn't hold at least 5 percent of the mortgage securities tied to those loans on its books.
MINI-OVERSTATED GAS MILEAGE
DETROIT (AP) -- The U.S. government has told BMW to reduce the gas mileage estimates on window stickers of four Mini Cooper models.
Testing by the Environmental Protection Agency lab in Ann Arbor, Michigan, discovered the overstated mileage.
The vehicles affected are the 2014 Mini Cooper three-door and Mini Cooper three-door S models with manual and automatic transmissions. BMW must cut the highway mileage by one-to-four miles per gallon depending on the model. Estimates for city driving and combined city and highway fuel economy also must be reduced.
The EPA says it audited the Mini gas mileage and came up with lower values than BMW, which makes the cars. It's the fourth time in the past two years that the EPA has found discrepancies in the gas mileage estimates provided by an automaker.
NEW YORK (AP) -- A new study confirms what many Internet users know all too well: Harassment is a common part of online life.
The report by the Pew Research Center found that nearly three-quarters of American adults who use the Internet have witnessed online harassment. Forty percent have experienced it themselves.
The types of harassment Pew asked about range from name-calling to physical threats, sexual harassment and stalking. Half of those who were harassed said they didn't know the person who had most recently attacked them.
Young adults -- people 18 to 29 -- were the most likely age group to see and undergo online harassment.
The survey was conducted between May 30 and June 30 among 3,217 respondents.
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