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The $36.1 trillion U.S. debt limit was hit on Tuesday, prompting the Treasury to use emergency funding measures.
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A suspension of debt issuance until March 14 could suppress bond yields and help stocks.
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Meanwhile, the protracted debate over the debt limit could lead to a potential stalemate.
The Trump trade may be boosting stocks in the early days of a new presidential administration, but the bond market is coming off a tailback that could continue its rally in the coming months.
The $36.1 trillion debt ceiling was hit Tuesday, according to a letter to Congress from outgoing Treasury Secretary Janet Yellen.
That left the Treasury relying on “extraordinary measures” to avoid the threat of a technical default. Some of those measures include the Treasury Department making payments into certain government accounts, such as the Postal Service Health Benefits Fund, to meet more pressing obligations.
It also means that the Ministry of Finance has suspended debt issuance until March 14, 2025, when the debt limit cap is expected to be resolved in the government financing law.
According to Lawrence Gillum, chief fixed-income strategist at LPL Financial, the Treasury’s suspension of new debt issuance is a silver lining for equity investors who have recently been hooked on rising yields.
“This suspension period could provide some well-needed (albeit temporary) relief from the supply/demand concerns that have helped propel Treasury yields of late,” Gillum said in a recent note.
Recent Treasury auctions have fueled jumps in bond yields, as investors grow concerned about the U.S. government’s debt ceiling and debt deficit spending.
“We already have discussions literally every day when we have a Treasury auction, ‘hey, what metrics were in the auctions and what are those numbers that tell us in terms of overall fiscal sustainability,’ which Jay Powell, of course, always points out is already unsustainable,” Torsten Slok, economist at Apollo, said earlier this month.
If interest-rate bond yields fall during the absence of Treasury auctions until March 14, that could serve as a bullish catalyst for stock prices. Stocks delivered in December, and the first two weeks of 2025, as the 10-year US Treasury yield approached the 5% level that has historically been a negative catalyst for stocks.
The lack of new Treasury supply could be a win for investors who own both stocks and bonds.
Eric Wallerstein, chief market strategist at Yardeni Research, told Business Insider that lower bond supply will “technically” be positive for asset prices. However, it could also raise concerns among investors if the debt limit issue lingers too long.
