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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 July 25, 2014 17:51 GMT
WASHINGTON (AP) -- Orders for long-lasting manufactured goods rebounded in June after a May decline, helped by a recovery in demand in a key category that signals business investment plans.
The Commerce Department says that orders for durable goods increased 0.7 percent in June on a seasonally adjusted basis following a 1 percent decline in May.
A category viewed as a proxy for business investment plans rose a solid 1.4 percent, recovering after a revised 1.2 percent drop in May. It was the best showing since orders in this core capital goods category rose 4.7 percent in March.
The strength last month came from solid gains in demand for commercial aircraft and machinery. Economists expect economic activity will strengthen in the second half of the year, helped by stronger factory production.
DETROIT (AP) -- U.S. safety regulators are investigating whether an electrical problem can knock out the air bags on some older Hyundai Sonatas.
The probe announced Friday covers about 394,000 midsize cars from the 2006 through 2008 model years.
The National Highway Traffic Safety Administration says it has received 83 complaints about the problem. The agency says a sensor inside the seat belt buckle might fail. This can cause the air bags to malfunction or not inflate if there's a crash.
The problem also can affect the mechanism that tightens the seat belts before a crash. The problem can happen in either the driver or passenger buckles. In most cases the air bag warning light came on.
Investigations can lead to recalls but none has been issued so far in this case.
CHILD TAX CREDIT
WASHINGTON (AP) -- The House has passed a bill that would gradually increase the child tax credit and make it available to more families with higher incomes.
But millions of low-income families would lose the $1,000-a-child credit in 2018, when enhancements championed by President Barack Obama are set to expire.
The bill also aims to make a dent in illegal immigration by prohibiting people without Social Security numbers from claiming a portion of the credit reserved for low-income families.
The White House has threatened to veto the bill, saying it favors high-income taxpayers over the poor, while adding $90 billion to the budget deficit over the next decade.
House Republicans say the bill strengthens the tax credit by increasing it as inflation rises, and by making it available to more middle-income families.
LONDON (AP) -- Official figures show Britain's economy has surpassed its pre-recession size for the first time since the 2008 global banking crisis.
The Office for National Statistics says gross domestic product grew by 0.8 percent in the three months through June compared with the previous quarter. It grew 3.1 percent over the year, putting it 0.2 percent ahead of its pre-crisis peak in early 2008.
The global financial crisis triggered a deep downturn for the British economy. By mid-2009, GDP was more than 7 percent below its pre-recession level.
Treasury chief George Osborne said Friday's figures marked a "major milestone in our long-term economic plan."
Government critics say the recovery is not built on solid foundations and point out that per-capita GDP remains about 6 percent lower than before the crisis.
BERLIN (AP) -- German business confidence is down for a third month in a row amid ongoing concerns about the economic impact of the crises in Ukraine and Iraq.
The closely-watched Ifo Institute survey fell to 108 points in July from 109.7 points in June. Economists had widely been expecting a slight rise over June's figure.
The institute said Friday that businesses' assessment of their current situation fell to 112.9 points from 114.8 the previous month, while their expectations for the future fell to 103.4 from 104.8.
The Ifo survey is based on monthly responses from about 7,000 companies.
MOSCOW (AP) -- Russia's central bank has unexpectedly raised its key interest rate in a bid to stem inflation and support the currency as the country faces increasing economic pressure over its policies in Ukraine.
The bank said Friday it has lifted its one-week auction rate by 0.5 percentage points to 8 percent. The central bank cited "heightened geopolitical risks" that are likely to push down the Russian ruble, fueling consumer price inflation. Higher rates tend to support a currency but can hurt economic growth.
The rate has risen from 5.5 at the beginning of the year. That has helped support the ruble after a period of weakness, but growth is sliding.
The United States last week imposed tougher sanctions on Russia over its alleged unwillingness to help end the conflict in Ukraine.
BERLIN (AP) -- Germany's biggest airline, Lufthansa, says it and subsidiaries in other European countries will resume flights to Tel Aviv on Saturday after canceling operations for several days over safety concerns.
Lufthansa said Friday that it made the decision "on the basis of the most up-to-date information we have available and our own assessment of the local security situation."
It says flights will resume in stages starting Saturday morning. The decision also applies to subsidiaries Germanwings, Austrian Airlines, Swiss and Brussels Airlines.
The European Aviation Safety Agency on Thursday lifted a recommendation that airlines refrain from flying to Israel's main airport, which it made because of security concerns after a Hamas missile landed nearby this week. However, Lufthansa canceled flights scheduled for Friday.
AIR CANADA- ISRAEL FLIGHT
TORONTO (AP) -- An Air Canada flight had to circle Tel Aviv's airport for 10 minutes after air traffic control said the conditions needed to be confirmed as safe for landing.
Airline spokeswoman Isabelle Arthur said Friday Flight AC84 was advised to circle by Israeli Air Traffic Control shortly before 12 p.m. local time. She says the plane altered its course about 5 miles from Ben Gurion airport and landed 10 minutes later without incident. She did not say why.
Arthur says the return flight to Toronto departed Tel Aviv about two hours later. The airline plans to operate this evening's flight to Tel Aviv.
Flights by Air Canada and other airlines to Tel Aviv resumed Thursday after a suspension Tuesday following a Hamas rocket strike nearby.
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