U.S. stock markets were headed for a second week of losses while the dollar hovered near an eight-month low on fears the budget standoff in Washington will drag on.
Meanwhile the fear that the U.S. will not meet its Oct. 17 deadline to raise the debt ceiling hurt bond markets.
Fears of a U.S. default lifted interest rates on ultra-short-term U.S. Treasury bills to their highest levels in over 10 months on Friday, while the cost of insuring one-year U.S. government bonds against default hit the highest level since August 2011.
Treasury bills expiring at the end of October briefly traded above 18 basis points, compared to three basis points a week ago, before settling back to 13 basis points.
- Republicans push for talks to end U.S. government shutdown
Investor confidence was boosted Thursday afternoon when reports surfaced that House of Representatives Speaker John Boehner told his Republican party colleagues that he would not let the stalemate over the budget interfere with raising the debt ceiling.
'We are seeing some real volatility in the bill sector. Bills are showing the first signs of distress' - Jason Rogan, Treasuries trading, Guggenheim Partners
On Friday, however, Boehner said the Republican-controlled House will not vote on a "clean" spending bill without Conditions. He also demanded spending cuts in exchange for raising the government's borrowing limit.
The Dow Jones industrial average was up 63 points at 15,059 on Friday afternoon, well below the 15,409 it hit two weeks ago. The S&P was up 9.56 points to 1,688, after falling for nine of the past 12 sessions.
The U.S. dollar hit an eight-month low Thursday, though it gained 0.5 per cent on Friday to 80.136 against a basket of major currencies.
"If there's no agreement by the end of next week, the concern will really become greater and the impact will be more pronounced," said Kate Warne, investment strategist at Edward Jones in St. Louis. Warne helps oversee $670 billion in assets.
Lack of jobs data could stall Fed tapering
One of the big concerns is lack of government economic data including delayed release of the Labor Department’s month jobs market report, which was scheduled for Friday.
The Federal Reserve has been watching this indicator to determine when it is time raise rates and cut back on its $85-billion US a month bond-buying program. Markets had expected it to begin tapering in September, but when it announced it would not, it cited the slow pace of economic recovery in the U.S.
- U.S. Federal Reserve not ready to reduce stimulus
- U.S. hiring lacklustre in September, ADP report shows
The shutdown is likely to delay that recovery as jobs numbers are crucial for the Fed to decide when to begin ending its costly stimulus program.
On Oct. 17, when the government is projected to reach its debt ceiling, $85 billion US of Treasury bills will mature. The interest rate on that T-bill issue last traded at 0.13 per cent, up two basis points from late on Thursday and up nine basis points on the week.
Interest rates on T-bills that mature in the first half of November last traded at 0.11 per cent, five basis points higher than late Thursday.
"We are seeing some real volatility in the bill sector," said Jason Rogan, managing director of Treasuries trading at Guggenheim Partners in New York. "Bills are showing the first signs of distress."
The benchmark 10-year U.S. Treasury note was down 12/32, its yield at 2.646 percent.