U.S. stock futures gained broadly on Monday night after the White House and Republican policymakers came into a tentative agreement on raising the national debt limit.
Futures tied to the Dow Jones index gained 72 points or 0.2 percent. The S&P 500 futures rose by around 0.3 percent, and the Nasdaq Composite futures added 0.5 percent. The increase in U.S. benchmark stock futures signaled a stronger U.S. equity market in the following trading session.
Wall Street closed on Monday for Memorial Day and would resume on Tuesday. The U.S. stock market experienced volatility last week during the debt ceiling debate between top lawmakers. Analysts said investors generally avoided risk assets like stocks amid uncertainty caused by the unresolved crisis.
Over the weekend, President Joe Biden and House Speaker Rep. Kevin McCarthy agreed to raise the debt limit until January 1, 2025, with analysts saying the administration will see spending cuts for the upcoming fiscal year. Congress is set to vote on the bill as soon as Wednesday.
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The agreement came days before the potential debt default, which would have been the first time for the U.S. Previously, the Treasury Department warned that the default could happen on June 1, but the federal body last week announced the sales of government bills due on that date, extending the time limit.
The government’s inability to pay its debt obligations means failure in various federal programs, such as Medicaid, as well as increased borrowing costs for American households and businesses, which could accelerate a recession. The impact of a U.S. recession on the global economies would be significant, according to analysts.
U.S. Treasury to raise over $1 trillion
Despite the optimism that the U.S. may avoid a default, analysts say the debt ceiling crisis will have long-lasting effects. The Treasury Department is expected to sell more than $1 trillion worth of bills over a short period to improve its cash balance. The U.S. cash balance is currently at $39 billion, the lowest since 2017.
Morgan Stanley short-term interest rate strategist Efrain Tejeda predicted that Treasury bill issuance would amount to $730 billion over the next quarter and around $1.25 trillion from June to December. In the 2017-18 debt ceiling crisis, the Treasury issued $500 billion of bills in a month and a half.
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WisdomTree Investments head of fixed income strategy Kevin Flanagan said there would be a “knee-jerk reaction” in short-term Treasury yields because the market was sensitive to the change in the macroeconomic environment.
“So yields come down from their highs but because the Treasury will increase issuance, there is a floor in yields for that market,” said Flanagan.
The Treasury’s fundraising effort will likely pull out a significant amount of liquidity from financial markets. Analysts said it may add pressure to financial markets because of the U.S. Federal Reserve’s ongoing monetary tightening cycle.
U.S. lenders will see an increase in short-term funding rates, forcing them to further hike borrowing costs imposed on clients. Bank of America has projected that the large-scale issuance of T-bills will have an equivalent economic impact as a 25-basis-point rate hike by the Fed.
Analysts also note that the Fed’s reverse repurchase (RRP) agreement facility, which currently sits at over $2 trillion, will be a liability for the central bank. Citigroup strategist Matt King said money funds would likely maintain cash in RRPs, leading to a sizable drain in the central bank’s cash reserves as Treasury conducts fundraising.