Biden, Republicans reach deal to raise debt ceiling, strategist says

U.S. president Joe Biden and top congressional Republicans Kevin McCarthy have reached a tentative agreement to raise the federal government's $31.4 trillion debt ceiling, ending a months-long stalemate, two sources familiar with the talks said on Saturday.

The deal still faces a difficult path to pass through Congress before the U.S. runs out of money to pay its debts in early June.

There is certainly going to be relief in the fixed income markets. The credit markets and the Treasury bill market where there were the mostdistorted from uncertainty were where there were the most distortions from uncertainty. On Tuesday, when the market reopened in the U.S., I think we should see those two distortions fixed.

But what does it not solve is that along the entire Treasury curve yields have gone up recently. And I think they went up in anticipation that there will be a lot of issuance of Treasury bonds and notes and bills in the next few weeks because the U.S. Treasury has to replenish its cash. I think bond yields will stay high for a while that supply is absorbed.

And I think stocks can do okay, here. This was certainly one overhang in the stock market.

As far as the dollar goes, I'm inclined to think that it could strengthen the dollar a little bit because it will weaken the argument for de-dollarization. But not by much just a little more, because the dollar has already surged quite a bit in the past few weeks. This will be pretty good for the market. I think it will keep the expectations pretty red hot with how Nasdaq has been performing. It will be good for equities.

I think it may also give more reason for the Fed to be confident about trying to raise interest rates again. I think the market may actually seize the opportunity to price in a little bit more tightening in June, if they think that all else is equal, the economy is still running pretty hot - we can see that. In particular, the tech industry is experiencing a lift up. Also, spending has been pretty robust.

I think that just keeps the dollar up pretty well. We should, generally, be pretty happy with this, although we want to see what the color of the deal looks like, he said. It looks like this is coming more from cuts right, which is really what the Republicans were pushing for.

And it ll be important to see how long the deal is for, whether we're going to face these same issues again. Or whether those matters are going to be resolved with a long-term deal. It's a long-term deal, he said, and I very, very much doubt it's a long-term deal.