The Dow Jones ended the past week down 1% despite rallying on Friday, as negotiators in Washington appeared closer to a breakthrough in debt- ceiling talks. On Saturday, it was announced that House Republicans have reached a tentative deal with the White House to avoid a default on US government debt by raising the nation’s borrowing limit. Specifically, the debt ceiling limit was removed for the next 19 months.
Keep in mind, both sides were negotiating over $50 billion in government spending, a large absolute number, but quite small in terms of overall government spending. The potential deal includes minor spending adjustments such as reduced funding for the IRS by $10B annually in 2024 and 2025 and does not include any new taxes or government programs. President Biden urged House Democrats to vote for the legislation. However, the legislation will also need to win enough votes in the GOP-controlled House and Democratic-held Senate to raise the US debt ceiling in time to meet a June 5th deadline.
The countdown to a deal will continue to be closely watched as the Treasury Department has extended its estimate of being able to make payments on US debts until June 5th, which is four days longer than its previous estimate. This extension allows the department to make the June Social Security payments.
While the debt ceiling negotiations have been a popular topic in the financial press and attributed to be the driver of the daily moves in the stock market, we maintain a focus on the larger picture. The proposed resolution does very little to reign in government spending; non-defense spending will be flat in 2024 and increase 1% in 2025. Additionally, with the Treasury nearly depleted of funds, they now have unlimited ability to issue new bonds. This increase in bond supply may cause interest rates to remain higher for longer. Historically, additional Treasury issuance was met with strong demand from foreign investors and U.S. banks. Today’s situation is different, as many question foreign demand for U.S. dollar denominated investments and the stress in the U.S. regional banking system. While investors may be relieved, in the short term, that the risk of U.S government default has been mitigated (and rightly so to be relieved), the persistence of higher interest rates presents many longer-term issues for the consumer and corporations.
Have a good week ahead,
Dennis P. Barba, Jr.
CEO & Managing Partner
Michael P. Finkelstein, CFA
Partner
Sources:
www.barrons.com
www.cnbc.com
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