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Markets Suggest Debt-Ceiling Compromise, Pimco’s El-Erian Says

October 4, 2013

Oct. 4 (Bloomberg) -- Financial markets suggest that most investors anticipate that U.S. lawmakers will raise the limit on the nation’s debt and avoid a default on government securities, Pacific Investment Management Co.’s Mohamed El-Erian said.

"The alternative would be too awful to contemplate," El- Erian, chief executive and co-chief investment officer at the world’s biggest manager of bond mutual funds, said on Bloomberg Television’s "In the Loop" with Betty Liu. "Most people in the market think we will avoid a debt-ceiling debacle."

A partial U.S. government shutdown entered a fourth day amid wrangling by lawmakers over the budget and debt limit. The U.S. will run out of borrowing authority Oct. 17 and will have $30 billion in cash after that. The country would be unable to pay all of its bills sometime between Oct. 22 and Oct. 31, according to the Congressional Budget Office.

The Standard & Poor’s 500 Index gained 0.6 percent to 1,689.36 at 12:29 p.m. in New York, while the Stoxx Europe 600 Index climbed 0.1 percent. The yield on 10-year Treasuries increased four basis points to 2.65 percent.

The Treasury Department yesterday released a report about the consequences of reaching the debt ceiling, saying it may have catastrophic results that last decades, such as higher interest rates and slower economic growth.

 

‘Quite Catastrophic’

 

"If the debt ceiling gets taken hostage by politicians, you will see a much different reaction," El-Erian said from Pimco’s headquarters in Newport Beach, California. "The market expects as we get closer to Oct. 17 some realism will start occurring on Capitol Hill and politicians will avoid what potentially could be quite catastrophic both for the U.S. and the global economy."

Some concern can be seen in the bills market, El-Erian said. Rates on Treasury bills that mature Oct. 24 traded at 0.13 percent today, compared with negative 0.01 percent on Sept. 27, as investors demanded extra compensation for the risk of holding the securities. One-month rates touched 0.19 percent today, matching a 45-month high reached in November 2012, while rates on three-month bills were 0.03 percent, the biggest inversion of the spread since September 2008.

Bill Gross, founder of Pimco and co-chief executive officer, reiterated in a radio interview with Tom Keene that investors should focus on purchasing short-term debt that will benefit from the market’s mispricing of when the Federal Reserve will eventually increase borrowing rates.

The federal funds rate target will be 2 percent at the end of 2016, according to the median of estimates by Fed board members and regional presidents detailed on Sept. 18 in the central bank’s quarterly Summary of Economic Projections.

The $250 billion Total Return Fund managed by Gross has gained 2.3 percent in the past month, outperforming 98 percent of comparable funds, according to data compiled by Bloomberg. The fund has returned 7.8 percent on an annual basis in the past five years, placing it in the 88 percentile.

 

--Editors: Dave Liedtka, Paul Cox

 

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

 

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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