Joe Biden and Kevin McCarthy Reach Agreement to Raise Debt Ceiling, Markets Respond Positively

US President Joe Biden and top congressional Republican Kevin McCarthy have reached an agreement to raise the government’s $31.4tn debt ceiling for two years, potentially averting an economically destabilising default.[0] The agreement permits each party to assert a measure of success, as well as trade-offs.[1] Both sides had some requests denied.[1] The agreement was inked on Saturday, just days before the deadline, and must now get through the House of Representatives and Senate before June 5 to avoid default. There is confidence from both sides that it will be passed.[1] Wall Street responded positively to the news, with investors rejoicing during the opening hours in the European markets.[1] However, trading momentum remained thin due to the closed US and UK markets.[1]

The 2-year Treasury yield jumped for a 12th straight session on Friday, while yields for the 2-year and 10-year Treasury hit two-month highs this week as debt ceiling negotiations dragged on.[2] Meanwhile, the 3-month Treasury reached fresh highs with yields of 5.37% as of Wednesday.[3] In response to the news of the debt ceiling agreement, the yield on short-dated Treasury notes jumped on Monday, led by the one-month T-bill rate, indicating that investors and traders were avoiding the underlying Treasury bill, given concerns over whether the government would be able to pay its obligations after June 1.[2]

Fed-funds-futures traders boosted the likelihood on Friday afternoon that the Federal Reserve will lift rates again by another quarter of a percentage point in June to 66.5%.[4] The percentage has increased from 51.7% in the previous day.[5] According to the CME FedWatch Tool, a hike of this magnitude would result in the Fed’s primary benchmark rate target reaching 5.25-5.5%.[5] Taking into account the current market conditions, traders have estimated a probability of 24.7% for a similar increase in July.[3]

In Europe, eurozone government bond yields were higher as robust economic data and hawkish remarks by central bank officials triggered some upward repricing in market bets on eurozone interest rates.[6] Investors now await crucial European inflation data in May, which will provide important clues on the chances of a 0.25% rate hike in June.

The debt ceiling negotiations have been closely watched by investors, who have been concerned about the possibility of a default, which would have had major implications for the global economy. The agreement, while not perfect, provides some relief and stability for the markets. The next major event for investors to watch will be the European inflation data in May, which will provide important clues on the future of European interest rates.

0. “European Midday Briefing : Post Debt-Ceiling Relief Lifts Stocks”, 29 May. 2023,–43979082/

1. “Europe Shares Lost US Debt Ceiling Deal Gains Accumulated in Early Trade Hours – Equitypandit” EquityPandit, 29 May. 2023,

2. “: 1-month T-bill rate jumps to 5.6%, leading advance in short-dated Treasury yields”, 22 May. 2023,

3. “Two-year Treasury yield ends at highest since March after Fed’s meeting minutes” Morningstar, 24 May. 2023,

4. “Treasury yields nudge higher as bets on July rate hike rise” msnNOW, 25 May. 2023,

5. “2-year U.S. yield extends longest streak of advances since 2018 after PCE data” MarketWatch, 26 May. 2023,

6. “Eurozone yields set for weekly rise on repricing of ECB rate hikes” Kathimerini English Edition, 26 May. 2023,