Wall Street was watching as President Joe Biden said Wednesday that he is confident that the White House and congressional leaders would reach a deal on the debt ceiling. One worry is that once a resolution is reached, the government could start to issue new debt, which might push Treasury yields higher, and in turn weigh on stocks.
But that isn’t likely to be the case, according to Nicholas Colas, co-founder of DataTrek Research, who based his argument on historical data, current trends in inflation expectations and real rates. While analysts have been cutting their S&P 500 index
earnings estimates for the rest of the year, the market would need lower Treasury yields to support equity valuations at current levels, Colas said in a Wednesday note. Heading into first-quarter earnings, he said Wall Street analysts cut estimates for second-quarter earnings by 7% to roughly $53.14 per share from $57.16. The 10-year Treasury
yield was at 3.58% Wednesday, down about 25 basis points year-to-date, but still up almost 70 basis points from a year ago, according to Dow Jones Market Data. Back in 2011, when a debt ceiling deal was reached between the Obama administration and the Republican majority in Congress, only at the last minute, both real yields and inflation expectations declined, which is shown in the chart below.
Both real yields of 10-Year Treasury and inflation expectations declined after an agreement was reached after the 2011 debt ceiling debate, but the Federal Reserve was buying government bonds.
St. Louis Fed
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