U.S. Stocks Retreat While Treasuries Advance on Shutdown

CHICAGO (Oct 3)   U.S. stocks tumbled as concern grew that a political impasse in Washington over the budget could lead to a recession. Treasuries gained, reversing losses, while gold pared an earlier slide.

The Standard & Poor’s 500 Index fell 1.3 percent to 1,672.59 at 12:15 p.m. in New York as the benchmark gauge posted its worst drop since August and traded below its lowest close in almost a month. Ten-year Treasury yields decreased three basis points to 2.58 percent after rising three points earlier, while the cost of insuring the debt climbed to an eight-month high. Gold dropped 0.5 percent to $1,315.10 an ounce. The MSCI Emerging Markets Index advanced 0.8 percent as growth in China’s service industries improved.

As a partial government shutdown entered a third day, the Treasury Department warned that a federal default could lead to a recession as bad as the 2008 financial crisis or worse. President Barack Obama urged House Speaker John Boehner to hold a vote on funding federal operations without strings attached, saying the Republican leader’s refusal to do so is the only thing standing in the way of reopening of the government. The Institute for Supply Management’s U.S. non-manufacturing index fell to 54.4 in September from 58.6 and below the median economist estimate of 57.

“What we are starting to realize today especially is that this might go on for a while,” Mike Sorrentino, who helps oversee about $3 billion as chief strategist at Global Financial Private Capital Llc, said by phone from Sarasota, Florida. “The debt ceiling is a cause for concern. If we can get through that and we can get through the dysfunction with this government, there will be a much safer road ahead.”

Default Consequences

The government will run out of borrowing authority Oct. 17, according to the Treasury, leaving only cash to pay the bills. A U.S. default caused by Congress failing to raise the $16.7 trillion federal debt limit could have catastrophic consequences that might last decades, Treasury said in a report today.

“Not only might the economic consequences of default be profound, those consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation,” the Treasury said in the report.

“In the event that a debt limit impasse were to lead to a default, it could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth -- with many private-sector analysts believing that it would lead to events of the magnitude of late 2008 or worse, and the result then was a recession more severe than any seen since the Great Depression,” the department said in the report.

Jobless Claims

Another report today showed fewer Americans than forecast filed applications for unemployment benefits last week. Jobless claims rose by 1,000 to 308,000 in the week ended Sept. 28, from a revised 307,000, the Labor Department said. The median forecast of 50 economists surveyed by Bloomberg called for a rise to 315,000.

Gauges of industrial, commodity and technology stocks lost more than 1 percent to lead declines in all 10 of the main industry groups in the S&P 500. Boeing Co., Chevron Corp. and General Electric Co. lost at least 1.9 percent to lead declines in 29 of 30 stocks in the Dow Jones Industrial Average retreated.

Eli Lilly Co. dropped 3.3 percent after saying it would be “challenging” for the drugmaker to meet its 2014 sales target. United Technologies Corp., a supplier of helicopters and jet engines to the military, retreated 1.8 percent after saying the shutdown would lead to as many as 5,000 temporary layoffs.

U.S. Swaps

The yield on 10-year Treasury notes climbed after dropping three basis points yesterday. The rate touched a high for the year of 3.005 percent on Sept. 6. The 10-year average is 3.53 percent.

The cost of insuring against losses on Treasuries rose, with credit-default swaps linked to U.S. government debt increasing 6 basis points to 41.26 basis points, the highest since February. That compares with a peak of 56 basis points in July 2011, when a political standoff threatened to shutter programs and delay bond payments.

The amount of debt protected by default swaps has fallen to $3.4 billion dollars from $5.6 billion two years ago and compares with $13 billion of outstanding insurance on German bunds. There are 886 credit-default swaps contracts linked to U.S debt outstanding, according to the Depository Trust & Clearing Corp. There were 56 trades covering a gross $2.1 billion of Treasuries in the week through Sept. 27, compared with 10 trades the week before.