A blunt warning Monday from a credit rating firm about the U.S. government's mounting debt pushed stock markets lower and intensified political divisions in Washington about how best to tackle growing deficits.
Both the Obama administration and House Republicans scrambled to gain leverage from Standard & Poor's changing its outlook on U.S. Treasury securities to "negative" from "stable.
"S&P didn't lower its top-notch AAA-bond rating for U.S. government Treasury securities, and their prices initially fell but later rebounded amid optimism that the report could serve as a catalyst to force both sides in Washington to compromise.
The Dow Jones Industrial Average fell 140.24 points, or 1.14%, to 12201.59, its biggest decline in a month, after earlier tumbling almost 250 points. Stocks in Britain, Germany and France fell more than 2%, with most of the declines coming after the S&P news. Gold surged to just below $1,500 an ounce.
But hopes that the report might spur a deficit deal actually helped U.S. borrowing costs and the dollar. The 10-year Treasury bond rose 9/32 in price, pushing its yield down to 3.373%, its lowest 3:00 p.m. level since March 23. The dollar rose against the euro.
A downgrade would push up interest rates on Treasurys, which are a benchmark for other consumer and business borrowing rates, raising the cost of credit throughout the economy.
The S&P report questioned whether the White House and Republicans would be able to reach an agreement before the 2012 presidential elections on a plan to rein in deficits.
"The sign of political gridlock was a key determinant in our outlook change," said John Chambers, chairman of the sovereign ratings committee at Standard & Poor's Ratings Services.
This year's budget deficit is projected to rise to between $1.5 trillion and $1.65 trillion, equal to roughly 10% of America's gross domestic product, or total economic output.
The White House is hoping to form a group of Democratic and Republican lawmakers to craft a framework for reducing the deficit, but has made little progress. Vice President Joe Biden plans to host the group's first meeting May 5.
Treasury Secretary Timothy Geithner has warned lawmakers that their reluctance to raise the federal borrowing limit could cripple the recovery, and the jittery reaction to the S&P report could underscore his arguments about how badly markets would react to any failure to raise the debt ceiling.
The U.S. debt now stands at $14.219 trillion—just shy of the $14.294 trillion cap—and is expected to balloon in part because of rising costs for health care, retirement and other so-called entitlement programs, and the interest on existing debt.
If no action is taken, the government could default on its debt by July 8. Wall Street executives have called Capitol Hill with increasing frequency in recent weeks, urging it to raise the debt ceiling immediately.
Although S&P said it changed its outlook even while assuming the debt ceiling will be increased, many Republicans cited the report in affirming their position that they would raise it only in exchange for a commitment to address the deficit.
"As S&P made clear, getting spending and our deficit under control can no longer be put off for another day, which is why House Republicans will only move forward on the President's request to increase the debt limit if it is accompanied by serious reforms that immediately reduce federal spending and end the culture of debt in Washington," said
House Majority Leader Eric Cantor (R., Va.).
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Dallas hedge-fund manager J. Kyle Bass helped advise the University of Texas Investment Management Co. on taking delivery of 6,643 gold bars, worth $987 million on April 15, now stored in a bank warehouse in New York.
Bass, who made $500 million with 2006 bets on a U.S. subprime-mortgage market collapse, said managers of the endowment, known as UTIMCO, sought board approval to convert its gold investments into bullion this year. A board member, Bass, 41, said he was asked to help with that process.
While Bass, a managing partner at Hayman Capital Management LP, said in an April 16 e-mail that “the decision to purchase and take delivery of the physical gold” was made by endowment staff members, “I helped where I could.” Gold futures touched a record $1,489.10 an ounce April 15 in New York before closing at $1,486.
The Texas fund’s $19.9 billion in assets ranked it behind only Harvard University’s endowment as of August, according to the National Association of College and University Business Officers. Last year, UTIMCO added about $500 million in gold investments to an existing stake, saidBruce Zimmerman, the endowment’s chief executive officer. The fund’s managers sought to take delivery of bullion to protect against demand for the metal overwhelming supply, according to Bass.
Open interest in gold futures and options traded on the Comex typically exceeds supplies held in its warehouses. If the holders of just 5 percent of those contracts opted to take delivery of the metal, there wouldn’t be enough to cover the demand, Bass said.
“If you own a paper contract where they can only deliver you 10 cents on the dollar or less, you should probably convert it to physical,” said Bass, who isn’t related to Fort Worth’s billionaireBass family. He said holding cash wasn’t a better choice because the rate of inflation exceeds money-market rates by 2.5 percent to 3 percent, eroding the value of cash.
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Metalheads (and I don't mean fans of Metallica, Megadeth and their ilk) got a nice little gift from Standard & Poor's Monday morning.
Gold and silver shot up Monday after the credit rating agency spooked Wall Street by revising its outlook for the United States' debt to "negative." (Kind of reminds me of the fictitious "Seinfeld" movie, "Prognosis Negative.")
The two precious metals tend to do well in times when investors are jittery and want to invest in something safe and tangible. Stocks, bonds and the dollar may be just pieces of paper. But you can hold a piece of gold or silver in your hand.
Unsurprisingly then, they have been surging for most of this year thanks to a maelstrom of uncertainty. Egypt. Libya. Japan. Europe's PIIGS. China rate hikes. There's a lot to make you nervous before you even start worrying about Uncle Sam's budget woes.
Gold hit yet another new all-time high Monday and is tantalizingly close to $1,500 an ounce. Silver is just a hair below $43, a 31-year high. Can they possibly keep heading higher?
Probably. At least for the short-term.
The S&P warning is just the latest in a series of troubling bits of news. While the stock market has largely shrugged off one bad headline after another, it's getting harder to ignore the obvious: the entire world is still healing from the global near-meltdown of 2008 and 2009.
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