Despite a divided Congress, analysts are generally optimistic about the possibility of a deal to increase the U.S. debt limit being passed. In order to prevent a government default, which has never happened before, an agreement was made over the weekend between US President Joe Biden and House Speaker Kevin McCarthy.

Investors may discover a “market opportunity” amid the political unrest, says Renaissance Macro Research partner and head of strategy Stephen Pavlick. Republican demands were given some leeway by the negotiations, including stiffer job requirements for low-income Americans.

Biden, McCarthy appear near two-year deal on US debt ceiling as default looms | Reuters
The settlement postpones the debt limit suspension through the 2024 presidential election to January 1, 2025. Additionally, except for military and veterans, expenditure will mostly stay flat in 2024; however, a 1% rise in spending is anticipated in 2025.

Although there has been an agreement in principle, the House of Representatives and the Senate still need to approve it.

Professor of finance Jeremy Siegel of the University of Pennsylvania’s Wharton School voiced confidence in the deal’s success, saying, “I think it is virtually certain that it will be passed.” He expected just a one-year delay and thought it was a good idea to suspend the debt ceiling until 2025.

Siegel also pointed out that the decision to push back the debt ceiling discussion until after the subsequent election was made in an effort to keep the focus off the crucial problems that now divide the nation.

Biden-McCarthy Debt Ceiling Meeting: Debt Limit Meeting Ends Without a Breakthrough - The New York TimesThe agreement was, however, attacked by certain Republican members, and other hardliners vowed to obstruct its approval. Although he conceded that the majority may change dramatically, Pavlick projected that McCarthy would have the backing of a “majority of Republicans” in the House.

Given that Republicans have a tenuous grip on the House, Pavlick stated that McCarthy could need to depend on moderate Democrats to ensure the bill’s approval. He stressed the importance of President Biden’s involvement in winning over these centrist voters. Pavlick anticipated Senate approval in the event of success.

Pavlick saw the agreement as a “Republican victory” and said that the negotiation itself had been successful for Republicans. He emphasized the fact that Biden was finally forced to discuss the debt ceiling after originally refusing to do so.

David Roche, president and chief strategist for Independent Strategy, on the other hand, thought the agreement was a “Democratic win.” Roche expected the measure would pass the House with Democratic support despite the likelihood of right-wing Republicans voting against it. He thought the agreement would temporarily fix the problem until 2025, when borrowing would be authorized until that year, when it would reappear.

Growing debt ceiling deal hopes send stocks higher | ReutersPavlick emphasized the need for the U.S. Treasury to replenish its reserves and quipped that if investors expected Federal Reserve rate decreases, it may provide a buying opportunity. Pavlick advised purchasing Treasury bonds in order to get better returns.

Additionally, Siegel saw that U.S. futures showed a modest increase, which he attributed to the possibility of a settlement, which lessens some uncertainty. But he issued a warning, saying that investors should be particularly concerned about the strong tightening measures adopted by the Federal Reserve. Siegel voiced concern about possible lending limits that may materialize in the second half of the year, especially for small- and mid-sized businesses.

Investors will carefully follow events as the agreement moves through Congress, taking into account prospective investment opportunities and the effect of the Federal Reserve’s tightening measures.


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