President Barack Obama signed a debt-limit compromise thatprevents a U.S. default on the day the Treasury had warned thenation's borrowing authority would expire, according to spokesmanJay Carney.

The Senate earlier today voted 74-26 for the measure, whichraises the nation's debt ceiling until 2013 and threatens automaticspending cuts to enforce $2.4 trillion in spending reductions overthe next 10 years. It won backing from 45 Democrats, 28 Republicansand one independent. The House passed the plan yesterday.

Obama said approval of the measure is a “first step” on a paththat must include increased revenue and spending cuts.

“We can't balance the budget on the backs of the very people whohave borne the brunt of this recession,” the president said in theWhite House Rose Garden.

Passage ends a months-long battle over spending that consumedCongress as lawmakers and the Obama administration negotiated tothe last days to avert a potential default. Still, the compromiselegislation defers decisions on the nation's finances to abipartisan panel of lawmakers and may reduce government deficitsonly modestly while slowing economic growth.

'Push and Pull'
“The push and pullAmericans saw in Washington these past few weeks was not gridlock,”said Senate Republican leader Mitch McConnell of Kentucky. “It wasthe will of the people working itself out in a political systemthat was never meant to be pretty.”

“This bill does not solve the problem,” McConnell said. “But itforces Washington to admit that it has one.”

The risk of a U.S. sovereign default remains “extremely low,”Fitch Ratings said. Still, the U.S. needs to confront “tough”choices on tax and spending against a weak economic backdrop if thebudget deficit is to be cut to safer levels over the medium term,Fitch said.

Fitch said it expects to conclude its scheduled review of theU.S. sovereign rating by the end of August.

For all the anxiety in Washington over the debt debate andaverting a default on the nation's financial obligations, investorswith the most at stake made more money buying Treasury securitiesin July than any month this year. They made $183,000 for every $10million invested.

Treasuries
Investors snapped up Treasuriesin the $9.34 trillion market, driving yields on 10-year notes — abenchmark for everything from mortgage rates to corporate debt — tothe lowest levels since November.

Treasuries rose, pushing 30-year bond yields below 4 percent forthe first time this year.

Yields on 30-year bonds dropped 11 basis points, or 0.11percentage point, to 3.97 percent at 12:57 p.m. in New York,according to Bloomberg Bond Trader prices, the lowest since Nov. 3,2010. The 4.375 percent securities maturing in May 2041 rose 128/32, or $18.75 per $1,000 face amount, to 106 30/32.

The 10-year note yields touched 2.64 percent, the lowest sinceNov. 12, the day the central bank started its $600 billion round ofTreasury purchases, which ended in June.

Stocks extended losses. The Standard & Poor's 500 Index fellfor a seventh straight day, losing 1.3 percent to 1,270.77 at 1:18p.m. in New York. The Dow Jones Industrial Average fell 110.68points, or 1 percent, to 12,011.81.

House Vote
The House voted 269-161yesterday for the deficit-reduction measure, which raises the $14.3trillion debt ceiling enough to fund the government until 2013 andthreatens automatic spending cuts if a bipartisan congressionalcommittee doesn't identify reductions that Congress willaccept.

“Finally, Washington is taking some responsibility for spendingmoney we don't have,” said Lamar Alexander of Tennessee, thethird-ranking Senate Republican. “This is a change in behavior fromspend, spend, spend to cut, cut, cut.”

Second-ranking Democrat Dick Durbin of Illinois said his votefor the plan “does not come without pain” because it will reducefunds for disease research and education programs for poorchildren. Lawmakers must “be prepared to raise revenue” in futureefforts to cut the deficit, he said.

The legislation falls short of the long-term deficit savingsthat Obama initially sought. The political obstacles to reachingeven the lower target are formidable, though the measure'ssanctions improve prospects “a bit,” said Peter Orszag, Obama'sformer budget director.

'Hyper-Polarized'
“The fundamental problemis that we are hyper-polarized, and that does not go away,” saidOrszag, now a vice chairman of Citigroup Inc. and a contributor toBloomberg View. “This deal is not going to solve that.”

Bill Gross, who runs the world's biggest bond mutual fund atPacific Investment Management Co., said the debt ceiling compromisewon't make a “significant dent” in U.S. deficits.

“In addition to an existing nearly $10 trillion of outstandingTreasury debt, the U.S. has a near unfathomable $66 trillion offuture liabilities at net present cost,” Gross wrote in a monthlyinvestment outlook posted on the Newport Beach, California-basedcompany's website today.

Representative Paul Ryan, a Wisconsin Republican who is chairmanof the House Budget Committee, said today on CNBC that lawmakersmust confront spiraling costs of entitlement programs.

“Medicare is driving itself into bankruptcy; Medicaid isbankrupting states,” Ryan said. “Our health-care entitlements arethe core driver of our debt. Programs need to be reformed andstrengthened if they're going to be saved.”

Discretionary Spending
A $917 billion downpayment in discretionary spending reductions contained in themeasure is back-loaded so more than two-thirds of the cuts comeafter 2016. The spending reduction next year is $21 billion, lessthan two-tenths of a percent of U.S. gross domestic product.

Amid signs that the economic recovery slowed almost to astandstill earlier this year, Michael Feroli, chief U.S. economistfor JPMorgan Chase & Co., said he expects the spending cutsnext year to “add modestly” to the drag on growth from expiringprovisions of the economic-stimulus package and the scheduled Dec.31 end of a temporary payroll tax cut.

While the measure specifies the $917 billion in discretionaryspending cuts over 10 years, the rest is left to a panel of 12members of Congress, split evenly between the two parties.

That “super-committee” is supposed to come up withrecommendations by Nov. 23, with a guaranteed up-or-down vote byCongress to prevent obstruction through parliamentary maneuvers. IfCongress doesn't act, automatic spending cuts begin in 2013.

History of Failure
Still, the sanctionsrun up against a history of failure when Congress has tried tomotivate itself with threats of penalties. No Congress can bind asuccessor, and the impact of sanctions relies primarily on thepolitical embarrassment of reversing course.

The 1985 Gramm-Rudman-Hollings Act set enforceable budgettargets that Democrats credit with pressuring Republican PresidentRonald Reagan to agree to tax increases. Still, during the fiveyears of the law, the spending reductions required were reduced inone case by Congress and in another overridden by a subsequentbudget agreement.

Among the sanctions that would trigger political pushback ifCongress didn't meet its goals is an automatic cut of up to $500billion in military spending, which would come on top of $325billion in defense-spending reductions already in the deal.

Military Cuts
“If the American military iscut as much, in the worst case, as the proposal would cut it, it'sthe beginning of the end of America as a great internationalpower,” Senator Joseph Lieberman, a Connecticut independent, saidon the Senate floor yesterday.

While the new joint committee will have broad jurisdiction toreduce the deficit through both spending cuts and tax increases,congressional rules present obstacles to using the Bush-era taxcuts to meet that goal.

The Congressional Budget Office's revenue baseline assumes thosetax cuts will expire as scheduled at the end of 2012. Republicanswant a future revenue level equal to extending all the cuts, whilethe administration wants to raise about $1.8 trillion above thatlevel over the next decade by letting tax cuts for only high-incomeearners expire. Measured against the CBO's yardstick, eitherapproach would be viewed as a tax cut, not deficit reduction.

Though White House press secretary Jay Carney said the committeecould choose to use a different yardstick, at least one Republicanwould have to agree for majority support.

“This compromise we have reached is not perfect,” said SenateMajority Leader Harry Reid of Nevada. “The richest of the rich havecontributed nothing to this.”

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.