The US debt limit may be an unsung bull catalyst for stocks in the early months of 2025

• The $36.1 trillion US debt limit was hit on Tuesday, prompting the Treasury to use extraordinary funding measures.

• A suspension of debt issuance through March 14 could suppress bond yields and help stocks.

• Meanwhile, a prolonged debt ceiling debate could lead to potential gridlock.

The Trump trade may be boosting stocks in the early days of the new presidential administration, but there's a tailwind coming from the bond market that could keep the rally going in the coming months.

According to a letter to Congress from outgoing Treasury Secretary Janet Yellen, the $36.1 trillion debt ceiling was hit on Tuesday.

That has left the Treasury Department to rely on "extraordinary measures" to avoid the threat of a technical default. Some of those measures include the Treasury Department pausing payments into certain government accounts, like the Postal Service Retiree Health Benefits Fund, to meet more pressing obligations.

This also means that the Treasury Department has suspended the issuance of debt through March 14, 2025, when the debt ceiling limit is expected to be addressed in a government funding bill.

According to Lawrence Gillum, chief fixed-income strategist at LPL Financial, the Treasury's suspension of new debt issuance is a silver lining for stock investors who have been spooked recently by rising yields.

"This suspension period could provide some well-needed (albeit temporary) relief from supply/demand concerns that have helped push Treasury yields higher recently," Gillum said in a recent note.

Recent Treasury auctions have sparked jumps in bond yields, as investors grow increasingly concerned about the US government's debt limit and debt-fueled deficit spending.

"We already have discussions literally every day when we have a Treasury auction around, 'hey what was the metrics on the auctions and what are these numbers telling us in terms of the overall fiscal sustainability,' which Jay Powell of course always keeps on pointing out is already unsustainable," Torsten Slok, economist at Apollo, said earlier this month.

If interest bond yields fall during the absence of Treasury auctions through March 14, it could serve as a bullish catalyst for stock prices. Equities were dinged in December and the first two weeks of 2025 as the 10-year US Treasury yield approached the 5% level that has historically been a negative catalyst for stocks.

The lack of new Treasury supply could be a win-win for investors who own both stocks and bonds.

Eric Wallerstein, chief markets strategist at Yardeni Research, told Business Insider that lower bond supply would "technically" be positive for asset prices. Still, it also could raise concerns among investors if the debt ceiling issue lingers for too long.

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