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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 30, 2014 17:28 GMT
WASHINGTON (AP) -- The U.S. economy grew at a solid annual rate of 3.5 percent in the July-September quarter, propelled by solid gains in business investment, export sales and the biggest jump in military spending in five years.
The Commerce Department says that the third quarter result followed a 4.6 percent rebound in the second quarter. The economy shrank at a 2.1 percent rate in the first three months of the year due to a harsh winter.
The report was the first of three estimates of the gross domestic product, the economy's total output of goods and services. Economists believe the economy is maintaining momentum in the current quarter with consumer spending expected to be helped by a big fall in gas prices.
WASHINGTON (AP) -- The number of people seeking unemployment benefits rose slightly last week, but remained at historically low levels that signal a strengthening job market.
The Labor Department says weekly applications increased 3,000 to a seasonally adjusted 287,000. The four-week average, a less volatile measure, declined 250 to 281,000, the lowest level in more than 14 years.
Applications are a proxy for layoffs and have fallen 20 percent in the past year. The steady decline suggests that businesses are sufficiently confident in the economy to hold onto their staffs. That same confidence could lead them to step up hiring.
The economy expanded at a solid annual rate of 3.5 percent in the July-September quarter, according to a separate government report. That's healthy enough to encourage more hiring.
WASHINGTON (AP) -- Average U.S. long-term mortgage rates arrested their five-week decline this week but the benchmark 30-year loan remained below 4 percent.
Mortgage company Freddie Mac says the nationwide average for a 30-year mortgage rose to 3.98 percent from 3.92 percent last week. It remained at its lowest level since June 2013. The rate stood at 4.53 percent back in January.
The average for a 15-year mortgage, a popular choice for people who are refinancing, increased to 3.13 percent from 3.08 percent.
The sustained decline in long-term rates sparked a boomlet of homeowners looking to refinance mortgages. Homeowners eager for a bargain rate fired off inquiries to lenders. Applications for "re-fi's" reached their highest level since November 2013 in the week ended Oct. 17, according to the Mortgage Bankers Association.
WASHINGTON (AP) -- Federal regulators are suing baby food-maker Gerber for claiming that its Good Start Gentle formula can prevent or reduce allergies in children.
The Federal Trade Commission says that claim is bogus and that the New Jersey-based company misled consumers by suggesting the formula was the first to meet government approval for reducing the risk of allergies.
The FTC says it wants Gerber to remove that claim from formula labels and advertisements. The agency also wants Gerber to reimburse consumers who have bought the formula since 2011, when the claim began.
Gerber Products Co., also known as NestlT Infant Nutrition, says in a statement that it believes it has met all legal requirements about product claims.
NEW YORK (AP) -- Wal-Mart Stores Inc. is considering matching online prices from competitors like Amazon.com, raising the stakes for the holiday shopping season.
The world's largest retailer, based in Bentonville, Arkansas, has matched prices of local store competitors but hadn't followed moves by other retailers like Best Buy or Target to match prices of online rivals. It said it has been testing the strategy in certain markets and is trying to figure out whether to go ahead.
The strategy comes as Wal-Mart is trying to rev up sluggish sales in the U.S. but it could also erode profits.
A Wal-Mart spokeswoman says many store managers have matched online prices for customers on a case-by-case basis.
The move was first reported by The Wall Street Journal on Thursday.
UNDATED (AP) -- Microsoft is looking to challenge Apple and Google with its own system for consolidating health and fitness data from various fitness gadgets and mobile apps. Microsoft is also releasing a $199 fitness band to work with this system.
As more athletes and recreationalists track their fitness, a chief frustration has been the inability to bring data from one gadget into an app made by a rival. As a result, nutrition information might reside in one place, while data on calories burned might be in another. Consolidating data gives users and health professionals a bigger picture on health.
Microsoft Health follows the launch of Apple's HealthKit in September and Google Fit earlier this week. Unlike rival systems, Microsoft Health will work with competing phones, not just those running Windows.
MADRID (AP) -- Spain's parliament has approved new intellectual property laws that allow news publishers to charge aggregators each time they display news content in search results.
The law goes into effect Jan. 1 but does not specify how much aggregators like Google News could be charged. Spain's AEDE group of news publishers had lobbied for what is known as the "Google Tax" but has not provided specifics.
Google Inc.'s Spanish division said Thursday it was disappointed with the outcome and will work with Spanish news publishers to help them increase income.
Google last year agreed to help French news organizations increase online advertising revenue and fund digital publishing innovations to settle a dispute there over whether it should pay for news content in its search results.
BEIJING (AP) -- Chinese computer maker Lenovo Group has completed its acquisition of Motorola Mobility from Google Inc. in a move aimed at becoming a global smartphone brand.
Lenovo said it completed the $2.9 billion purchase on Thursday, adding to a flurry of acquisitions and initiatives aimed at transforming the world's biggest maker of personal computers into a major player in wireless computing.
Google bought Motorola Mobility in 2012 for $12.4 billion but appeared to decide quickly the purchase was a mistake. It sold its set-top operations to Arris Group Inc. for $2.35 billion and its smartphone assets, along with some 2,000 patents, to Lenovo.
Lenovo chairman Yang Yuanqing said when the purchase was announced in January that it would help transform Lenovo into a global competitor in smartphones.
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