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Fearful Americans Hoard Bonds, Dividends

BOSTON ( TheStreet) -- Many Americans are relieved, though angered, that Congress worked out an 11th-hour deal so the world's largest economy avoids defaulting on its debt.

But the situation is even worse than they may have feared. After legislators stop playing political games with the nation's debt limit, they will face calls to revive the economy, which has slowed dramatically. Restricting borrowing and raising taxes, which is likely, will put an even larger damper on the economy.

With such dire circumstances, investors now have an appetite for U.S. Treasuries and dividend stocks as they count on income in tough times, says Jason Brady, co-portfolio manager for the Thornburg Investment Income Builder Fund (TIBAX). Investors' reaction to recent economic data reenforces the need for better risk management and dependable income.

After rallying more than 1% to 1,307.38 on news of a potential debt deal early Monday, the S&P 500 fell below 1,284 by 10:30 a.m. following a weaker-than-expected read on the Institute for Supply Management's manufacturing report. The S&P 500 fell another 16 points Tuesday to 1,271 after data on consumer spending unexpectedly fell 0.2% in June.

So much for Wall Street's celebration of Washington's great compromise. Bespoke Investment noted that Monday was only the 10th time since 1985 that the S&P 500 rose 1% or more in the first half-hour of trading, only to give back all of that and more in the next 30 minutes. The market continued to sell off following the report's release, with the S&P 500 falling as low as 1,274.73. Crude and gold, which have been popular for speculators, dropped in price.

On the other hand, U.S. Treasuries rallied in price on the manufacturing report Monday and consumer spending report Tuesday, dropping the yield on the 10-year Treasury to 2.68%, the lowest since November. There's demand for U.S. bonds, even in the face of a potential downgrade of the coveted triple-A debt rating by credit-ratings agencies like Standard & Poor's and Moody's.

The weak ISM manufacturing data is just the latest in a string of disappointing economic reports, which have taken a backseat to the debt-ceiling circus. Early last month, the government's jobs report showed anemic job growth as the U.S. unemployment rate ticked higher. Last week, the second-quarter read on gross domestic product was lighter than economists had predicted. Even worse, first-quarter GDP was revised from growth of 1.9% to a meek 0.4%.
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