Stocks rally on US debt deal

The stock market rallied Wednesday afternoon after the United States (US) Senate announced a last-minute agreement to avoid a United States default and reopen the government on the 16th day of the shutdown.

The Dow Jones industrial average shot up by 206 points, or 1.4 per cent, to 15,373.83 in early afternoon trading after the deal was announced.

Despite the gridlock, stock investors have stayed largely calm throughout the latest twists in the current fiscal drama in Washington. Even before Wednesday's news, the Standard & Poor's 500 index and the Dow Jones industrial average were up for the month.

"Investors have become, unfortunately, accustomed to some of the dysfunction," said Eric Wiegand, a senior portfolio manager at US Bank. "It's become more the norm than the exception."

The Standard & Poor's 500 index rose 23.48 points, or 1.4 per cent, to 1,721.54 Wednesday, just four points from its all-time high of 1,725 set September 18.

The Nasdaq composite rose 45.42 points, or one per cent, to 3,839.43.

US$16.7 Trillion CEILING

Without a debt deal, the United States would have hit the October 17 deadline after which it could no longer borrow money to pay its bills, increasing the chance of a default on government debt of US$16.7 trillion.

The market for US Treasury bills reflected relief among bond investors. The yield on the one-month T-bill dropped to 0.20 per cent from 0.40 per cent Wednesday morning, an extraordinarily large move. The decline means that investors consider the bill to be less risky.

The yield on the 10-year bond edged down to 2.71 per cent from 2.74 per cent Tuesday. Yields on longer-term US government debt haven't moved as much as those on short-term debt because investors believed that the government would work out a longer-term solution.

The feeling among traders in recent days was that panicking and pulling money out of the market would hurt their investments.

In the summer of 2011, the Standard & Poor's (S&P) 500 index plunged 17 per cent between early July and early August as lawmakers argued over raising the debt limit and S&P's cut the US credit rating from 'AAA' its highest ranking. The market later recovered.

CONTOURS OF DEAL

Congress was to vote on the Senate deal, which would avert a threatened Treasury default and reopen the government.

"This is a time for reconciliation," said Senate Majority Leader Harry Reid of the agreement he forged with the GOP leader, Senator Mitch McConnell of Kentucky.

McConnell said that, with the accord, Republicans had sealed a deal to have spending in one area of the budget decline for two years in a row, adding, "we're not going back".

Officials said the proposal called for the Treasury to have authority to continue borrowing through February 7, and the government would reopen through January 15.

It also set a mid-December deadline for bipartisan budget negotiators to report on efforts to reach compromise on longer-term issues like spending cuts. And it likely would require the Obama administration to certify that it can verify the income of people who qualify for federal subsidies for medical insurance under the 2010 health care law.