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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 August 29, 2014 17:14 GMT
WASHINGTON (AP) -- U.S. consumer spending fell in July, with a drop in auto purchases accounting for most of the weakness. Income growth also slowed in July.
The Commerce Department says consumer spending edged down 0.1 percent last month after a 0.4 percent increase in June. It was the first decline in spending since January. Income growth slowed to a 0.2 percent rise in July, the weakest showing in seven months.
The fall in spending came primarily from a decline in auto sales, which took a breather in July after posting big gains in recent months, although spending in other areas was also weak.
Consumer spending accounts for 70 percent of economic activity, so it needs to recover for the economy to keep its momentum in the second half of the year.
WASHINGTON (AP) -- U.S. consumer sentiment ticked up in August, driven by greater optimism about jobs, rising incomes, and increasing wealth. The increase largely occurred among higher-income groups.
The University of Michigan says its index of consumer sentiment rose to 82.5 from 81.8 in July. Still, it has barely risen in the past year.
Consumers have sent mixed signals in recent months. The Michigan index has fluctuated between 80 and 82.5 since December. A measure of consumer confidence by the Conference Board rose this month to nearly a seven-year high. And yet Americans cut back their spending in July.
Nearly 60 percent of households in the top third of income earners say they are financially better off this month, the Michigan survey found, compared with only 36 percent in the bottom two-thirds.
DETROIT (AP) -- U.S. investors should soon be able to buy stock in Chrysler for the first time in seven years.
Italy's Fiat and Chrysler are merging to form Fiat Chrysler Automobiles. Fiat says Friday that an ongoing tally of investors suggests there is not enough opposition to derail the deal.
Earlier this month, Fiat shareholders approved combining the companies. But Italian law gives dissenters the right to cash out. Fiat has said that if investors offered more than 500 million euros ($650 million) in shares, the merger would be off.
Fiat SpA will announce the final tally by Sept. 4. So far the maximum number of shares to be cashed is below the cap.
Shares of Chrysler haven't been publicly traded since 2007 when it was still combined with German automaker Daimler.
RICHMOND, Va. (AP) -- Federal regulators are putting Reynolds American Inc.'s planned $25 billion takeover of rival cigarette maker Lorillard Inc. under the microscope.
The nation's second-biggest tobacco company said Friday that the Federal Trade Commission has asked for additional information as part of an antitrust review of the deal.
In July, Reynolds announced the deal to combine two of the nation's oldest and biggest tobacco companies, creating a formidable No. 2 to rival Altria Group Inc., owner of Philip Morris USA.
Reynolds markets Camel, Pall Mall and Natural American Spirit cigarettes. Lorillard sells Newport, Maverick and Kent cigarettes.
The companies plan to sell the Kool, Salem, Winston, Maverick and blu eCig brands to Imperial Tobacco Group for $7.1 billion to ease regulatory concerns about competition.
HEALTH OVERHAUL-TAX FORMS
WASHINGTON (AP) -- The federal agency that brought you the glitchy HealthCare.gov website has a massive new project.
If the Health and Human Services department has trouble this time, that could delay tax refunds for many people.
Complicated connections between the new health care law and income taxes will start to surface in 2015.
HHS has to send millions of people who got health insurance tax credits this year a new tax form that's like a W-2 for health care. It's called a 1095-A.
If they're delayed beyond Jan. 31, people who got coverage through the new insurance exchanges may have to wait to file their taxes -- and collect their refunds.
Some tax preparation companies are worried.
The Obama administration says it's on task, but won't provide much detail.
BRUSSELS (AP) -- Inflation has fallen to an annual 0.3 percent in August for the 18 countries that use the euro, underlining the shakiness of the continent's economic recovery.
Eurostat, the EU statistics agency, says the figure is down from 0.4 percent in July, as expected by market analysts.
Core inflation, which excludes volatile food and energy, sent a modestly brighter signal as it rose to 0.9 percent from 0.8 percent.
The eurozone economy showed no growth in the second quarter as fears about the Ukrainian crisis weighed on consumers and investment decisions.
The European Central Bank has warned that inflation expectations are worsening and says it will add more stimulus if needed. Many analysts are predicting the bank will launch large-scale purchases of financial assets to pump more money into the economy.
SAO PAULO (AP) -- Brazil's government says the country's gross domestic product contracted 0.6 percent in the second quarter compared with the previous three months, sending the country's economy into a recession.
The government's IBGE statistics bureau said Friday it was the second consecutive quarterly contraction of the economy.
In the first quarter of the year, GDP was reported as having grown 0.2 percent. But that figure was revised downward to minus 0.2 percent.
The IBGE says the country's GDP stands at 1.27 trillion reals ($567 billion).
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