Stocks rise on hopes of deal

NEW YORK - Wall Street thinks Washington's gridlock could be easing.

Stocks posted modest gains Friday, driven by budding optimism among traders that Washington's bickering politicians can reach an agreement on the budget and increasing the government's borrowing limit soon.

The stock market rose for just the third time in 12 days. The Dow Jones industrial average closed up 76.10 points, or 0.51 percent, at 15,072.58. The Standard & Poor's 500 index rose 11.84 points, or 0.71 percent, at 1,690.50 and the Nasdaq composite index gained 33.41 points, or 0.89 percent, at 3,807.75.

Traders are not expecting a miracle. The rhetoric between Democrats and Republicans remains as hot as ever. But the pressure to end the shutdown and raise the debt ceiling is climbing quickly.

Despite Friday's gains, the trend for the last three weeks in the stock market has been lower. The Dow is down nearly 4 percent since hitting an all-time high on Sept. 18.

While remote, the possibility of the United States' failing to pay its bills or creditors remains a deep concern to investors.

"Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse," the Treasury Department said in a report Thursday.

Under normal circumstances, traders would have the government's monthly jobs report to parse on the first Friday of the month. But the shutdown has forced the Labor Department to postpone release of September's data for at least the foreseeable future.

Not all parts of the market were optimistic Friday. Yields for the one-month T-bill that mature around the time the U.S. government is expected to hit its borrowing limit have risen to their highest level in a year. The yield on one-month T-bill was 0.12 percent, up sharply from 0.01 percent five days ago.

Bond market observers said that fund managers for money market funds, who primarily invest in these types of securities, have been selling short-term Treasuries. Fund managers don't want to be stuck holding U.S. government debt maturing around the time the federal government hits its borrowing limit. The Treasury Department has said the government's borrowing authority would be exhausted Oct. 17.

Average investors have also been moving out of riskier assets. Roughly $300 million was pulled from stock mutual funds last week, according to fund tracking firm Lipper. It was the first time this year that mutual funds saw net outflows, Lipper said. Exchange-traded funds also saw investors head toward the exits, with $2.8 billion leaving ETFs last week.

"We have seen a pull out of [stocks] and investors moving to cash," said Kristina Hooper, head of U.S. investment strategies at Allianz Global Investors. "We're very focused on being there, holding our clients' hand and helping them think about the long-term so they're not getting rattled."