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The US debt limit of $36.1 trillion was reached on Tuesday, prompting the Treasury to resort to extraordinary financing measures.
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A suspension of debt issuance until March 14 could lower bond yields and help stocks.
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At the same time, a prolonged debate on the debt ceiling could lead to a possible impasse.
The Trump move may have boosted stocks in the first days of the new presidential administration, but the bond market is benefiting from a tailwind that could sustain the rally in the months to come.
According to a letter to Congress from outgoing Treasury Secretary Janet Yellen, the $36.1 trillion debt ceiling was reached on Tuesday.
This forced the Treasury Department to resort to “extraordinary measures” to avoid the threat of a technical default. Some of these measures include the Treasury Department suspending payments to certain government accounts, such as the Postal Service Retiree Health Benefits Fund, to meet more pressing obligations.
This also means that the Treasury Department has suspended the issuance of debt securities until March 14, 2025, when the debt ceiling is expected to be addressed in a government funding bill.
According to Lawrence Gillum, chief fixed income strategist at LPL Financial, the Treasury’s suspension of new debt issuance is a glimmer of hope for equity investors who have been spooked recently by rising yields.
“This suspension period could provide much-needed (albeit temporary) relief from the supply and demand issues that have helped drive Treasury yields higher recently,” Gillum said in a recent note.
Recent Treasury auctions have sparked a rise in bond yields as investors grow increasingly concerned about the U.S. government’s debt ceiling and debt-fueled deficit spending.
“We already have discussions literally every day when we have a Treasury auction, ‘hey, what were the parameters of the auction and what do these numbers tell us in terms of overall fiscal sustainability,’ which Jay Powell keeps doing well sure to point out is already unsustainable”, Torsten Slok, economist at Apollo, said earlier this month.
If interest bond yields fall in the absence of Treasury auctions through March 14, it could serve as a bullish catalyst for stock prices. Stocks took a hit in December and the first two weeks of 2025, as the 10-year U.S. Treasury yield approached the 5% level, which has historically been a negative catalyst for stocks.
Lack of new Treasury reserves could be a win-win situation for investors who own both stocks and bonds.
Eric Wallerstein, chief market strategist at Yardeni Research, told Business Insider that a decline in bond supply would “technically” be positive for asset prices. However, it could also cause concerns among investors if the debt ceiling issue lingers for too long.
