Debt deal welcomed by investors, though risks loom

Global investors are gaming out how a tentative deal to raise the United States debt ceiling could ripple through markets, as lawmakers strive to pass the agreement through Congress before a June 5 deadline.

A deal to lift the $31.4 trillion debt limit announced by the White House and House Republicans late Saturday would avert a catastrophic U.S. default and boost overall appetite for risk, while also buoying some of the sectors that have been left behind in this year’s tech-led equity rally, such as cyclical stocks and small caps, investors said.

The initial reaction was positive. Wall Street futures rose, with S&P 500 e-minis up 0.3% and Nasdaq e-minis up 0.5% . U.S. Treasury note futures were up around 0.2% in a sign that U.S. Treasury yields, which move inversely to prices, will fall when bond trading resumes. U.S. markets were closed on Monday for a public holiday.

U.S. five-year credit default swaps narrowed, meaning that the cost of insuring against exposure to a U.S. debt default fell. The U.S. dollar index was steady at 104.26.

But some investors are wary that proposed spending cuts could weigh on U.S. growth. At the same time, a negotiation process that barely avoided a default threatens to undermine the U.S. standing with credit ratings agencies.

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