Stocks rise sharply on optimism for a debt deal

10/16/2013

NEW YORK — Stocks rose sharply in early trading on Wall Street today as optimism rose that lawmakers would reach an eleventh-hour deal to prevent a possible debt default.

Senate leaders are optimistic about forging a deal preventing a federal default and ending the partial government shutdown after Republican divisions forced GOP leaders to drop efforts to ram their own version through the House.

The Dow Jones industrial average rose 166 points, or 1.1 percent, to 15,333 in morning trading following a report that House Speaker John Boehner had agreed to take up a Senate compromise on raising the debt ceiling. Rates on short-term U.S. government debt also fell as investors became less nervous about a possible default.

The Standard & Poor’s 500 index gained 19 points, or 1.1 percent, to 1,717. The Nasdaq composite rose 40 points, or 1 percent, to 3,834.

Unless the borrowing limit is raised, the U.S. will hit a Thursday deadline after which it can no longer borrow money to pay its bills, increasing the chance of a default on government debt. That possibility has unnerved markets all month.

“The lawmakers know it’s in our best interest for this to be settled,” said JJ Kinahan, chief derivatives strategists for TD Ameritrade. “There’s a belief that they’ll take it as far as they can and ultimately, at the last minute, settle it.”

Yields on Treasury bills fell sharply as hopes built for compromise ahead of the Thursday deadline to raise the U.S. debt ceiling. The yield on the one-month T-bill dropped from 0.40 percent to 0.21 percent today, an extraordinarily large move. The decline means that investors consider the bill to be less risky.

The yield on the 10-year bond edged up to 2.75 percent from 2.74 percent on Tuesday. Yields on longer-term U.S. government debt haven’t moved as much as those on short-term debt because investors generally believe the government will work out a longer-term solution for paying its debts on time even as partisan gridlock in Washington holds up a short-term solution.

Fitch Ratings said late Tuesday that it may downgrade the government’s AAA bond rating. The agency said it sees a higher risk for default because of the uncertainty over whether Congress will raise the debt limit. Fitch said it will make a final decision by the end of March at the latest, depending on how long any agreement to raise the debt ceiling lasts.