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President Barack Obama answers questions on the ongoing budget negotiations during a press conference in the Brady Briefing Room of the White House in Washington, Friday, July 15, 2011.

Pablo Martinez Monsivais/AP

A flicker of hope was all it took to make investors feel better about the U.S. political process.

Stock and bond prices rallied Tuesday after President Barack Obama endorsed a new bipartisan proposal to ease the country's debt burden, as investors bet politicians would raise the legislative borrowing limit before the Aug. 2 deadline and avoid default.

The new budget plan, put forward by a small group of Democratic and Republican senators, was short on detail and would need to pick up support in the House of Representatives to have a serious chance of gaining traction.

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Still, after daily talks at the White House last week appeared to do little but harden opposing positions, the mere scent of compromise was enough to change the mood on Wall Street.

Stocks took off after Mr. Obama made a surprise appearance in the White House press room, saying the latest proposal to end the debt impasse was "balanced" and on the "same playing field" as what the White House has been seeking.

The Dow Jones industrial average climbed more than 200 points, its biggest jump this year. The S&P 500 index gained 1.6 per cent to 1,326.73, rebounding from a three-week low on the biggest one-day rally since March. Bond prices, which move inversely to yields, climbed as hopes grew for a breakthrough in the debt-ceiling impasse. The yield on 30-year bonds dropped 0.12 percentage point to 4.19 per cent.

"It's time to get down to the business of actually solving this problem," Mr. Obama said. "We now are seeing the potential for a bipartisan consensus around what that would take."

Mr. Obama's optimism was rooted in a $3.75-trillion (U.S.) debt-reduction plan by a group of Democratic and Republican senators known in Washington as the Gang of Six.

The senators have been working on bridging the divide between their two parties for months, but appeared to have all but given up after Republican Tom Coburn of Oklahoma quit the group in mid-May.

Mr. Coburn was back in the fold on Tuesday, telling reporters the Gang of Six plan had been tweaked to add more than $100-billion in cuts to health care programs. (On Monday, Mr. Coburn released his own deficit-reduction proposal, suggesting cuts to spending and tax breaks that would reduce the budget gap by $9-trillion over 10 years.) The Gang of Six kept details to a minimum as they gave their colleagues in the Senate time to review its blueprint. The plan would seek to narrow the deficit immediately by $500-billion. Eventually, the Gang of Six would cut discretionary spending and the defense budget, contain the rising costs of Medicare and Social Security and kill tax breaks worth about $1-trillion.

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"We have gotten into the weeds," Idaho Republican Mike Crapo, a member of the Gang of Six, told Bloomberg Television. "This is a solid plan."

Mr. Crapo's group previewed their proposal at a closed door meeting attended by about 50 of the 100 senators on Capitol Hill. The reviews were positive.

"We've gone from a Gang of Six to a mob of 50," said Joe Manchin, a Democrat from West Virginia, according to the Washington Post. "This is a serious, bipartisan proposal that will stop Washington from spending money we don't have and I support it," Lamar Alexander, a Republican from Tennessee, told the Reuters news agency.

Despite the early support, the path ahead for the Gang of Six proposal remained unclear. The program would need the backing of 60 senators to pass the chamber without threat of being held up by filibuster. Its prospects in the House also are extremely uncertain because Republican congressmen and congresswomen have been steadfast in their refusal to endorse any proposal that raises taxes, which the Gang of Six plan technically does by scrapping tax breaks.

Mr. Crapo said the Gang of Six came up with their proposal in isolation of the debate over the debt ceiling, which House Republicans say they will agree to raise only if the Obama administration agrees to significant spending cuts. However, he said it was possible that the plan could become the "vehicle" for a resolution to the standoff.

Separately, Senate leaders continued to work on constructing a safety hatch that would see the debt limit lifted even if politicians fail to broker an agreement to reduce the deficit. This still might represent the most likely course. Despite his enthusiasm for the Gang of Six proposal, Mr. Obama said leaders should continue work on a fallback.

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"In the event that we don't get an agreement, at minimum, we've got to raise the debt ceiling," Mr. Obama said. "That's the bare minimum that has to be achieved, but we continue to believe that we can achieve more."

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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