Debt Showdown: Congress Seeks Solution

Struggling to avert a national default, congressional leaders jettisoned negotiations on a sweeping deficit-reduction package Friday despite a plea from President Barack Obama to "do something big" to stabilize America's finances.

Instead, lawmakers embarked on competing fallback plans as a critical Aug. 2 deadline neared, a House Republican version given little chance of success, even by some supporters, and a bipartisan Senate approach holding out more promise to avert what Obama called financial "Armageddon."

Late Friday, the Treasury Department announced it was resorting to the final steps in an unusual series designed to avoid exceeding the current $14.3 trillion debt limit. Numerous officials have cautioned that a default will occur if the limit is not increased by Aug. 2, warning also of a calamitous effect on a national economy struggling to recover from the worst recession in decades.

At the behest of conservatives, House Republicans announced plans to vote next week on legislation to permit more borrowing automatically if Congress approves a balanced-budget constitutional amendment.

At the same time, Senate leaders from both parties worked on their own fallback measure that would allow Obama to raise the debt limit without a prior vote by lawmakers, discussions that now have expanded to include House officials and top White House aides.

That plan was likely to include limits on spending across thousands of government programs, and possibly a down payment on cuts, as well.

As part of that proposal, a panel of lawmakers would recommend cuts in benefits programs by the end of the year, with the House and Senate required to vote yes-or-no on the package without possibility of changes.

"If they show me a serious plan I'm ready to move," declared Obama at his second news conference of the week, even though he said he wanted a far more sweeping deal that might even have raised the age of Medicare eligibility from 65 to 67 if Republicans would increase selected taxes.

Senate Republican leader Mitch McConnell said, "Now the debate will move from a room in the White House to the House and Senate floors," an indication that the daily closed-door negotiations on Obama's home ground were a thing of the past.

The House Republican rank and file were advised in a GOP meeting that, barring action by Congress, the government would be able to pay only about half its bills after Aug. 2, and separately that a default could cost the government trillions of dollars in the form of higher interest rates on the debt.

"No matter what 50 percent you choose to pay, there are things in that 50 percent you don't pay that would have really severe consequences," Rep. John Campbell, R-Calif., said afterward.

"There are people out there who keep saying we don't need to increase the debt limit at all. I think this was a way of saying, the people who are saying that need to look at the practical consequences of what they are saying."

Rep. Paul Ryan, of Wisconsin, chairman of the House Budget Committee, told reporters after the meeting he had discussed the additional costs generated by a default - an event that would be likely to raise interest rates.

At his news conference, Obama said that would mean "effectively a tax increase on everybody" by affecting car purchasers, students and businesses.

The second White House news conference in a week was a testament to the overriding political and economic significance of the issue that has convulsed Congress as well as the administration.

A Better Deal in Corporate Bonds

Investors in corporate bonds haven't gotten much for their money lately, but new signals suggest that's all about to change.

After a nearly 12-months tear, companies have been issuing fewer bonds -- a sign bond investors are tired of settling for low yields and weak investor protections, say market watchers. In June, issuance of new high yield bonds dropped 68% globally and 66% in the U.S. -- a turnaround from May, when global issuance hit an all-time monthly record of $50 billion, according to Thomson Reuters. Investment-grade bond issuance was down, too -- 46% globally and 65% domestically. Ultimately, this could show investors are demanding better deals before snapping up new issues again, says George Young, portfolio manager of the $85 million Villere Balanced fund. "You have sort of a standoff right now where investors say that's not enough of an incentive for me to lend you money."

In fact, this is already playing out in some parts of the market. Yields on corporate bonds both investment grade and high yield -- have inched up over the last few months as investors deemed them riskier investments and started demanding better rates, says Andrew Catalan, managing director of investment grade strategies for Standish. High-yield bonds now pay 5.3 percentage points more than comparable Treasurys, up from a low of 4.6 percentage points in April, according to Standard & Poor's Equity Research. Investment-grade bonds pay 1.7 percentage points over Treasurys, compared to a low of 1.6 percentage points. For investors, the higher yields mean corporate bonds are beginning to become attractive again, says Young.

The reversal in issuance was bound to take place sooner or later, say experts. Rabid appetite for corporate bonds over the last year has pushed prices up and yields down until investors simply bailed out, says Young. Plus, a host of economic worries -- including the spreading debt crisis in Europe, the still-weak housing and job markets in the U.S. and concerns about how the U.S. will handle its debt-reduction plan -- have driven investors away from corporate bonds and to safer bond investments and cash. Meanwhile, the combination of slack demand and a riskier economic environment has discouraged companies from issuing new bonds, says Jeff Tjornehoj, a senior analyst with fund researcher Lipper.

But while the corporate bond market may be shifting in favor of investors, experts caution there are still good reasons to steer clear until conditions improve more. Bond and equity performance could remain volatile until a resolution for dealing with the debt crisis is achieved in Europe and at home, and until economic reports on housing and unemployment brighten, says John Lonski, a chief economist at Moody's Investors Service. For example, Lon Erickson, corporate bond fund manager for Thornburg Investment Management, increased his fund's cash holdings to 5% from about 2% last month and says he would like to see yields increase by another .25 to .5 percentage points before putting more of his money to work in corporate bonds. "There's definitely more noise and volatility and you want to be compensated for that," says Erickson.

In the meantime, investing pros recommend sticking to only higher-quality corporate bonds and reducing exposure to junk, says Lonski. Fund manager Young says investors should also consider high-quality dividend paying stocks, which provide stable payments but could also rise if the economy improves, says Young.

China's Economy Grows 9.5%, Exceeds Estimates

China's economy and industrial output expanded more than analysts predicted, driving up stocks across Asia as the nation maintains momentum after monetary tightening to cool inflation.

Gross domestic product rose 9.5 percent in the second quarter from a year earlier, the statistics bureau said in Beijing today, after a 9.7 percent gain in the previous three months. The median estimate was 9.3 percent in a Bloomberg News survey of 18 economists.

Industrial output advanced 15.1 percent in June, the most since May 2010, even after the central bank boosted lending rates five times since mid-October and lifted bank reserve requirements to a record. Premier Wen Jiabao said yesterday that stabilizing prices remains the top priority, after food costs soared in June.

"This data should dispel concerns over a hard landing in China," said Wendy Liu, a Hong Kong-based analyst with Royal Bank of Scotland.

The Shanghai Composite Index of shares advanced 1.3 percent as of 2:14 p.m., paring to 0.5 percent the decline this year that has been driven by concern that monetary tightening will choke off growth. Yuan forwards strengthened and Asian stocks climbed.

An easing of power shortages and supply-chain disruptions from Japan's earthquake and a rebound in money- supply growth may have boosted output, according to Goldman Sachs Group Inc. The statistics bureau said the economy's momentum remained "strong" and highlighted gains in investment by local governments and private businesses.

The International Monetary Fund forecast last month that China's economy will expand 9.6 percent this year. In the U.S., where unemployment is rising, the expansion may be 2.5 percent, and in the euro zone, where soaring bond yields have signaled that a sovereign debt crisis may spread to Italy, the gain may be 2 percent, according to the IMF.

While the global economy is increasingly dependent on China's demand, weakness in the nation's import growth in June indicated limits to the contribution it can make. Inbound shipments grew by the least since 2009, climbing 19.3 percent from a year earlier, the customs bureau said July 10.

June housing transactions rose 31 percent from May even after government curbs to cool the property market, statistics bureau data showed. China Vanke Co., the country's biggest developer, says sales rose 79 percent in the first six months.