- The $36.1 trillion US responsible limit was hit on Tuesday, prompting the Treasury to use extraordinary funding measures.
- A suspension of debt issuance through March 14 could cease bond yields and help stocks.
- Meanwhile, a prolonged debt ceiling debate could lead to potential gridlock.
The Trump exchange may be boosting stocks in the early days of the new presidential administration, but there’s a tailwind coming from the bond market that could stow away the rally going in the coming months.
According to a letter to Congress from outgoing Treasury Secretary Janet Yellen, the $36.1 trillion encumbered ceiling was hit on Tuesday.
That has left the Treasury Department to rely on “extraordinary measures” to avoid the threat of a technical defect. Some of those measures include the Treasury Department pausing payments into certain government accounts, wish the Postal Service Retiree Health Benefits Fund, to meet more pressing obligations.
This also means that the Moneys Department has suspended the issuance of debt through March 14, 2025, when the debt ceiling limit is expected to be addressed in a administration funding bill.
According to Lawrence Gillum, chief fixed-income strategist at LPL Financial, the Treasury’s suspension of new debt issuance is a silver-tongued lining for stock investors who have been spooked recently by rising yields.
“This suspension period could take measures some well-needed (albeit temporary) relief from supply/demand concerns that have helped importune Treasury yields higher recently,” Gillum said in a recent note.
Recent Treasury auctions have kindled jumps in bond yields, as investors grow increasingly concerned about the US government’s debt limit and debt-fueled loss spending.
“We already have discussions literally every day when we have a Treasury auction around, ‘hey what was the metrics on the auctions and what are these totals telling us in terms of the overall fiscal sustainability,’ which Jay Powell of course always keeps on pointing out is already unsustainable,” Torsten Slok, economist at Apollo, imparted earlier this month.
If interest bond yields fall during the absence of Treasury auctions through March 14, it could give out as a bullish catalyst for stock prices. Equities were dinged in December and the first two weeks of 2025 as the 10-year US Bank yield approached the 5% level that has historically been a negative catalyst for stocks.
The lack of new Treasury equip could be a win-win for investors who own both stocks and bonds.
Eric Wallerstein, chief markets strategist at Yardeni Probe, told Business Insider that lower bond supply would “technically” be positive for asset prices. Stock-still, it also could raise concerns among investors if the debt ceiling issue lingers for too long.
“For instance, another run down of US debt by ratings agencies would likely boost Treasury yields as investors demand additional premium,” Wallerstein excused.
But there could be another silver lining of the coming debt ceiling debate. More wrangling over the outback’s borrowing limit could expose rifts within the GOP’s control of Washington,DC.
While President Trump wants Congress to strike out the debt limit once and for all so he can enact his agenda with few limitations, fiscal conservatives may balk at that idea — and with a razor-thin Republican seniority in the , it would only take a handful of defectors to tank a proposed deal.
Investors have historically cheered gridlock in Washington, as it scurvies few surprises are in store that could whipsaw markets.
While it may not be gridlock in the traditional sense when Democrats and Republicans each supervision one chamber of Congress or the White House, the takeaway could still be positive for stocks.
According to data from Carson Gathering, when Congress was split under a Republican president, the S&P 500 delivered an average annual return of about 14%, compared to a 7% middling annual return when Republicans controlled Congress.