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'Teflon America' shrugs off crises

| Wednesday, Oct. 9, 2013, 6:54 p.m.

NEW YORK — The federal government keeps stumbling from one budget crisis to another, but the damage never sticks.

Global investors still see it as the world's best place to park their money. Even the threat of an unprecedented government default doesn't seem to have dulled the allure of Teflon America. 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 United States.

“The more times you give politicians a chance to completely muck something up, the more chance ... they will do it,” said Gary Jenkins, managing director of Swordfish Research in London. “If this were to become a regular occurrence, then, who knows?”

The 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 nation 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 said a default on bond payments could freeze global credit, spike borrowing costs and trigger a collapse worse than the Great Recession. Some investors have dumped short-term Treasury bills coming due near the Oct. 17 deadline for fear they won't get paid. On Wednesday, Fidelity Investments said it has sold all those bills in their money market mutual funds.

But investors continue to buy most other Treasurys. On Wednesday, the yield on the 10-year note, which falls when investors buy, was 2.67 percent, near a two-month low.

Stocks have been drifting lower the past three weeks. Even so, the Standard and Poor's 500 index is just 4 percent below an all-time high reached on Sept. 18.

The debt ceiling fight echoes the congressional standoff over the same issue in summer 2011.

Experts say the United States attracts money now for the same reason it did back then: Many other countries are faring worse. 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 United States tends to “bounce back” from crises.

In the 2011 crisis, for example, 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 worried. Congress hasn't agreed on a spending bill for the new budget year that began on 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?” said Talley Leger, a strategist at Macro Vision Research, an investment consultancy.

Leger said it may take a further drop in stocks, perhaps a big one, to force lawmakers to compromise.

The precedent is the 778-point drop in the Dow Jones industrial average on Sept. 29, 2008, when Congress rejected a $700 billion bailout bill, known as the Troubled Asset Relief Program. The TARP bill was passed within days.

“This whole shutdown could easily drag out to the debt deadline,” said Bill Strazzullo, chief market strategist of Bell Curve Trading.

His said the Dow could fall to 14,200 — down 600 points from Wednesday's close.

The prospects for bonds are more complicated. When investors anticipate a crisis, they tend to buy 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 United States 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,” said Marshall Mays, director of Hong Kong-based Emerging Alpha Advisors.

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