US debt update: The U.S. debt ceiling reaching its limit can have significant ramifications for the US stock market.
The initial excitement from Trump's administration has bolstered the stock market, and the positive factors emerging from the bond market could continue to support stock gains in the coming months.
According to a letter to Congress from outgoing Treasury Secretary Janet Yellen, the debt ceiling has reached $36.1 trillion as of last Tuesday. This situation has forced the Treasury to resort to "extraordinary measures" to avoid the threat of technical default. These measures include pausing payments to certain government accounts, such as the Postal Service Retirement Health Benefits Fund, in order to meet more urgent obligations.
The suspension of bond issuance will remain in effect until the debt ceiling is anticipated to be addressed in government funding bills by March 14.
Lawrence Gillum, Chief Fixed Income Strategist at LPL Financial, indicated that the suspension could provide a glimmer of hope for stock investors who have been spooked by rising yields. “This pause may offer some much-needed (if temporary) relief from concerns about bond demand, which has recently contributed to rising U.S. Treasury yields,” Gillum noted in a recent report.
Investor concerns over the U.S. debt ceiling and deficit spending have led to soaring yields in recent Treasury auctions. Apollo economist Torsten Slok remarked earlier this month, “We discuss almost daily how the auction data reflects overall fiscal sustainability, and Powell has certainly pointed out that this is becoming unsustainable.”
If bond yields decrease without new Treasury auctions before March 14, it could serve as a catalyst for rising stock prices. The 10-year U.S. Treasury yield has approached 5%, a level that has historically acted as a negative catalyst for the stock market, contributing to declines in December and the early weeks of 2025.
A lack of new Treasury supply could be a win-win for investors holding both stocks and bonds. Eric Wallerstein, Chief Market Strategist at Yardeni Research, stated that reduced bond supply would “technically” benefit asset prices. However, prolonged debt ceiling concerns could also raise investor anxiety.
“For example, a downgrade by rating agencies of U.S. debt could push Treasury yields higher as investors demand additional premiums,” Wallerstein explained.
The upcoming debt ceiling debate may reveal fractures within the Republican control over Washington. While Trump aims for Congress to eliminate the debt ceiling permanently to implement his agenda unrestricted, fiscal conservatives may oppose this idea. Given the narrow Republican majority, even a few dissenters could derail proposed agreements.
Historically, investors have welcomed Washington gridlock as it tends to minimize unexpected market disruptions. Although the current situation isn’t a traditional stalemate, the division of power between the parties could still be favorable for the stock market.
According to Carson Group data, the S&P 500 has averaged an annual return of about 14% when Congress is split under a Republican president, compared to an average of 7% when Republicans have full control.
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