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HomeTreasuries, Wall Street Up As Debt-Ceiling Deal Gains Traction

Treasuries, Wall Street Up As Debt-Ceiling Deal Gains Traction

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The focus of the US market will be on progress in winning backing for the debt-ceiling agreement negotiated by the White House and Republican negotiators.

Early Tuesday, Dow Jones Industrial Average futures were up 65 points, or 0.2%. The S&P 500 futures jumped 0.3%, while the NASDAQ 100 futures rose 0.5%.

The proposed legislation will face an early test on Tuesday when it is heard by the House Rules Committee, with any delays increasing the likelihood that the government may fail on its payments. The so-called x-date of June 5 is approaching, when cash is expected to run out and the country would be unable to pay its creditors.

Analysts at Deutsche Bank wrote in a research note on Tuesday that there isn’t much room for mistake, but with moderates on both sides appearing to be in agreement, a noisy minority on both sides may oppose the compromise and it still pass. We’ll see how lawmakers react when they return from the holiday weekend.

Treasuries and US stock futures rose on optimism that Congress will enact a debt-reduction agreement to avoid a default, as the White House and Republican congressional leaders increased their lobbying in favor of the agreement.

Treasury rates declined across the yield curve, from five to thirty years. Short-dated Treasury note yields, which are the most vulnerable to a default, were indicated lower in early trade, extending a slide from recent highs.

The clock is ticking, with supporters of the pact having only one week to get it through Congress before a probable June 5 default. President Joe Biden has personally urged members to support the bill, which is expected to be voted on by the House on Wednesday before being sent to the Senate. Even if the agreement is accepted, traders must struggle with concerns such as a possible Federal Reserve rate rise, a Chinese slowdown, and a liquidity drain as the Treasury replaces its cash holdings.

The S&P 500 and NASDAQ 100 contracts increased 0.3% and 0.5%, respectively, while European markets were little moved. Nestle S.A. plummeted after the Swiss food company announced the resignation of CFO Francois-Xavier Rogeris. A major barometer of Hong Kong-listed Chinese equities sank, sending an Asia equity benchmark down. The Hang Seng China Enterprises Index was projected to tumble for the fifth day in a row, bringing its losses from a peak on January 27 to more than 20%.

The dollar, which has benefitted from the uncertainty around the statutory borrowing limit, has erased early dips versus the majority of its Group-of-10 counterparts. Nonetheless, the dollar index stayed below the two-month peak achieved last week. For the first time, the offshore yuan fell below 7.1 per dollar.

Assuming Congress approves the debt deal, the Treasury Department may sell more than $1 trillion of bills through the end of the third quarter to bolster its cash balances, according to some estimates.

“There is a significant potential for a liquidity drain in the system that is certainly not constructive for risk markets,” Vishwanath Tirupattur, chief fixed income strategist at Morgan Stanley, said on Bloomberg Television.

“There is a significant potential for a liquidity drain in the system that is certainly not constructive for risk markets,” Vishwanath Tirupattur, chief fixed income strategist at Morgan Stanley, said on Bloomberg Television.

“We believe this agreement secures a 25 basis point increase at the June 13-14 FOMC meeting.” With banking sector strains easing, a potential default was “really the only thing that could have prevented a hike next month,” wrote Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. in a note. “More importantly, rate cuts by the end of the year are now fully priced in, as they should have been long ago.”

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