Markets on edge as debt limit debate drags on

The word of the day in financial markets: Anxious.

Stocks fell in volatile trading Friday after a dismal report on economic growth added to a growing sense of unease as the federal government neared an Aug. 2 deadline to raise the nation’s borrowing limit. If Congress fails to act, the U.S. may not be able to pay all its financial obligations after Tuesday, including interest payments on bonds and the salaries of federal employees. A default on U.S. Treasury debt could wreak havoc on financial markets and the economy.

Major indexes fell sharply in early trading but erased some of their losses after President Barack Obama said there were many paths to a compromise on raising the debt limit. The Dow Jones industrial average was down 72 points at 12,166 in afternoon trading.

The combination of bad economic news and growing worries about a possible debt default was evident in nearly every measure of investor confidence:

— The Dow Jones industrial average was headed for its sixth straight day of losses.

— All 10 industry groups in the S&P 500 stock index fell.

— Gold rose nearly 1 percent to $1,631 an ounce.

— A measure of stock market volatility rose 5 percent.

— The cost to protect against a U.S. default within the next year reached a record high. The cost to insure Treasurys for one year jumped 54 percent this week.

Government bond prices rose in spite of concerns over a possible ratings downgrade or U.S. debt default. That’s because many institutional traders still consider Treasury securities the world’s safest investments. The yield on the 10-year Treasury bond fell to 2.79 percent, its lowest level of the year. Bond prices move in the opposite direction of their yields.

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