The brightening economic outlook has propelled stocks to the highest level in more than five years. The Standard & Poor’s 500 Index closed at 1,472.34 yesterday, the highest since December 2007, and an increase of 14% from a year ago.
Earlier this month Congress sidestepped a showdown over spending cuts and tax increases by raising payroll taxes and postponing a decision on automatic spending reductions for defense and health care.
The improving outlook for jobs and wages may help cushion the harm to consumer spending from the higher payroll tax used to pay for Social Security benefits. Starting this month, that tax rate returned to the 2010 level of 6.2%, from 4.2%, as part of the Jan. 1 fiscal pact passed by Congress.
Politicians are debating raising the nation’s legal borrowing limit, currently set at $16.4 trillion. The Treasury Department has been using emergency measures since the end of December to prevent a breach. The U.S. government makes about 80 million payments each month, including for Social Security, veterans’ benefits, defense contractors, law enforcement and income-tax refunds.
The debt limit has been periodically raised since its creation in 1917, when Congress and President Woodrow Wilson authorized the Treasury to issue long-term securities to help finance entry into World War I. Since 1960, Congress has raised or revised the limit 79 times, including 49 times under Republican presidents, according to the Treasury Department, noting the U.S. never has defaulted on its obligations.
The last time Congress fought over raising the ceiling, President Barack Obama signed an increase on Aug. 2, 2011, the day that Treasury warned U.S. borrowing authority would expire. Standard & Poor’s cut the nation’s credit rating.
Still, U.S. Treasury bond investors -- who most directly bear the risk of any government default -- haven’t shown alarm over political fights ultimately resolved in Washington. Yields on 10-year U.S. Treasury notes declined to 2.56% on Aug. 5, 2011, the day of the S&P downgrade, and continued to fall.
Yields on 10-year Treasuries, a benchmark for everything from mortgages to corporate borrowing costs, have fallen from more than 5% in 2007, before the financial crisis of 2008. The yield was 1.81% at 12:53 p.m. in New York.
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