WASHINGTON, DC – MAY 26: U.S. Speaker of the House Rep. Kevin McCarthy (R-CA) speaks to members of the media after arriving at the U.S. Capitol on May 26, 2023 in Washington, DC. Speaker McCarthy discussed the latest development of the debt ceiling negotiations with the White House. (Photo by Win McNamee/Getty Images)
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Analysts are broadly optimistic that the deal to raise the U.S. debt ceiling will pass a divided Congress.
Their comments come after U.S. President Joe Biden and House Speaker Kevin McCarthy reached an agreement over the weekend to raise the debt ceiling to avoid a first-ever government default.
In the midst of this turmoil, investors may be able to find a “market opportunity,” according to Stephen Pavlick, partner and head of policy at Renaissance Macro Research.
Negotiators have agreed to some Republican demands, such as stricter work requirements for low-income Americans.
The compromise also sees the debt ceiling suspended until Jan. 1, 2025, pushing it past the 2024 presidential election. Spending will also be largely held flat for 2024, except for defense and veterans, while 2025 will see a 1% increase in spending.
Even though the in-principle deal has been reached between the two sides, it will still need congressional approval by both the House of Representatives and the Senate.
“I think it is virtually certain that it will be passed,” said Jeremy Siegal, professor of finance at Wharton School at the University of Pennsylvania. He said he had “very little doubt that they weren’t going to reach an agreement… this is going to be a done deal and voted positively on Wednesday.”
He called the suspension of the debt limit till 2025 a “good decision,” and said he had expected it would be only delayed for a year.
“I think that they decided that they wanted to go after the next election to raise that debt limit, and not have another debate that could distract the American public from the main issues that separate the country.”
Still, some Republican lawmakers criticized the deal after the announcement, while other hardliners have threatened to sink the deal.
Pavlick predicts that McCarthy has the support of a “majority of Republicans” in the House, “but that majority can vary significantly.”
Speaking to “Squawk Box Asia” on Monday, Pavlick noted that about 75 hardline Republicans will probably oppose the deal, pointing at the ultraconservative House Freedom Caucus, as well as hardline Democrats.
As such, with Republicans only holding a slim majority of 222-213 in the house, Pavlick said he thinks McCarthy will have to rely on moderate Democrats to get the bill to pass.
“So it’s really going to be on President Biden to deliver the 75 more moderate votes to make sure it has enough to pass the House. I think if it does that, then the Senate passage is probably assured.”
To Pavlick, the deal was a “Republican victory.”
“The fact that there was a negotiation is, in itself a win for Republicans,” he said pointing out that Biden said that he would not negotiate about the debt limit earlier this year, but was “forced into this.”
He said the Democratic Party could have “done away with this when they had control of Congress during the end of last year, two years ago. And they chose not to.”
David Roche, president and global strategist for Independent Strategy saw this as a “Democratic win.”
He expects the deal will pass the House with Democratic support, although, like Pavlick, he said right-wing Republicans will likely vote against it.
As the bill allows borrowing through 2024, the country will likely be able to put this issue behind until it comes up again in 2025, Roche said.
Pavlick said the U.S. Treasury is going to have to “refill their coffers”, and if investors are looking at a scenario where the Federal Reserve is going to cut rates, “this might actually provide [a] market opportunity,” he said.
Pavlick suggests investors could look at buying Treasury bonds to “lock in some of those higher yields.”
Separately, Siegal pointed out that U.S. futures pointed to slight gains, and said it’s because a likely deal “does clear a little bit of uncertainty.”
However, the main worry ahead for investors will be the “tremendous tightening” that the Federal Reserve has done, Siegal warned.
“The bank problems, that will not lead to a crisis of bank deposits but tightening of lending standards, particularly for small- and mid-sized companies. And I am concerned about the second half of the year and possibly what we might see is now is a focus on those problems.”