Investor Enthusiasm May Add Momentum to Obama Deficit Deal Push
Investor Enthusiasm May Add Momentum to Obama Push
Mario Tama/Getty Images
A ticker shows stocks up on floor of the New York Stock Exchange after the closing bell on July 19, 2011 in New York City.
A ticker shows stocks up on floor of the New York Stock Exchange after the closing bell on July 19, 2011 in New York City. Photographer: Mario Tama/Getty Images
The surge in stock and bond markets after President Barack Obama embraced a $3.7 trillion debt- cutting plan from a bipartisan group of senators may add momentum to the administration’s push for a broad deficit deal.
The favorable market reaction “fills out the case” for the economic benefits of a compromise for both parties, said Patrick Griffin, who was President Bill Clinton’s chief congressional lobbyist from 1994 to 1996.
“Since this has really been psychological warfare as much as anything else for the last couple weeks, I think it does have an impact,” said Griffin, who helped the Democratic president navigate a Republican-controlled Congress. “It makes it more credible.”
Even so, yesterday’s plan from the Senate’s so-called Gang of Six faces significant obstacles in the House because it would include tax increases along with spending cuts, which Republican congressional leaders say they will oppose in any plan to shrink the deficit. That stand has led to a stalemate in weeks-long negotiations on raising the government’s $14.3 trillion borrowing authority before the Treasury Department forecasts it will be exhausted on Aug. 2.
“Tax increases aren’t going to fly in the House,” said Texas Republican Representative Kevin Brady, a member of the tax-writing Ways and Means Committee. “That’s not going to change.”
House Speaker John Boehner was non-committal on the senators’ proposal.
Falling Short
“This plan shares many similarities with the framework the speaker discussed with the president, but also appears to fall short in some important areas,” Michael Steel, a spokesman for the Ohio Republican, said in an e-mail. For the time being, a constitutional amendment to balance the budget and make it more difficult to raise taxes “remains our focus,” Steel said.
The group of three Republican and three Democratic senators released their framework yesterday as polls showed the public mood has turned against Republicans in the debt talks.
Seventy-one percent of Americans disapprove of congressional Republicans conduct in the talks on the debt ceiling versus 48 percent who disapprove of Obama’s performance in the negotiations, according to a CBS News poll conducted July 15-17. Half of self-identified Republicans said they disapprove of how their party leaders are handling the issue.
Support for Compromise
According to a Washington Post-ABC News poll conducted July 14-17, more than three-quarters of Americans say the Republican leadership has been too resistant to compromise on the deficit versus about six in 10 who say Obama isn’t willing enough to reach agreement. Among Republicans, 58 percent see the party as too resistant to a deal, up from 42 percent who said so in March.
The plan from the Gang of Six, led by Republican Senator Saxby Chambliss of Georgia and Democratic Senator Mark Warner of Virginia, calls for an immediate $500 billion in spending cuts followed by a longer-term effort to force bigger reductions, and $1 trillion in tax increases. The plan also would lower tax rates and limit the growth of entitlement programs such as Medicare and Social Security.
Obama appeared at a White House briefing to embrace the proposal, though he stopped short of endorsing it in full. He called it “broadly consistent” with what he has sought and “a very significant step” in so-far fruitless negotiations.
“We now are seeing the potential for a bipartisan consensus,” he said.
Signs of Support
About 50 senators, roughly evenly divided between the two parties, attended a closed-door briefing on the proposal, a sign of potentially widespread support. One member of the Republican leadership, third-ranking Senator Lamar Alexander of Tennessee, publicly endorsed it.
“In the next 24 hours, you’re going to see a significant portion of the Senate come behind this,” said Republican Senator Tom Coburn of Oklahoma, who rejoined the Gang of Six today after he abandoned the talks in May over an impasse on Medicare cuts. “This doesn’t solve our problems, but this creates the way forward where we can,” he said.
Senate Republican Leader Mitch McConnell of Kentucky was noncommittal. “I don’t have an opinion yet,” he told reporters.
Obama’s embrace of the framework stirred a surge in financial markets as investors concluded a deal with significant debt reduction is now more likely, traders said.
Move in Markets
“This is the biggest on-the-announcement move we’ve had” in the debt-limit negotiations, said Carl Lantz, New York-based head of interest rate strategy for Credit Suisse Securities USA LLC.
Throughout the debt limit talks, the assumption in financial markets has been that political leaders in Washington will conclude a deal in time to avert a default, Lantz said. Still, investors haven’t expected major deficit reductions, he said. After yesterday’s events, “there is some reassessment of that,” he added.
“At least for today everyone is looking at the markets through rose-colored glasses,” said Richard Schlanger, who helps manage $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “In Washington, a lot of things can change, just like the weather down there.”
Stocks surged yesterday, sending the Standard & Poor’s 500 Index to its biggest gain in four months, and Treasuries rallied, with 30-year bond yields falling the most since 2010. Gold futures dropped.
The S&P 500 jumped 1.6 percent to 1,326.73. Ten-year Treasury note yields lost five basis points to 2.88 percent, and 30-year bond yields fell 12 basis points to 4.19 percent, according to Bloomberg Bond Trader prices.
‘Robust Proposal’
“The upside in Treasuries has been a function of this new, more robust proposal from the Gang of Six,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “There’s a reasonable amount of perceived momentum behind that, the concept being that’s the type of proposal needed to keep the credit-rating agencies at bay.”
Still, some analysts said there was less to the Gang of Six outline than meets the eye because it set goals without specifics.
“The market completely overreacted to this Senate plan,” said Tom Porcelli, chief economist at RBC Capital Markets. “There’s an idea that could easily go nowhere.”
To contact the reporter on this story: Mike Dorning in Washington D.C. at mdorning@bloomberg.net.
To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.
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