Janet Yellen warns of jump in US borrowing costs amid debt ceiling standoff

Janet Yellen warned that the impasse over the debt limit could result in a jump in government borrowing costs, as the Treasury secretary doubled down on predictions that the US risks running out of cash as early as June 1.

“The Treasury’s borrowing costs for securities maturing in early June have increased significantly,” Yellen said in a letter sent to congressional leaders on Monday.

She also reiterated her estimate earlier this month that the so-called X-date – when the government runs out of money and runs the risk of defaulting – could come in 17 days unless legislators lift the borrowing limit.

Yields on short-term Treasury bills maturing next month rose as the debt ceiling loomed, reflecting growing concerns among investors about the prospects of default. Investors avoided US government bonds maturing around the X-date, forcing Treasuries to pay higher rates at auction.

In early May, a four-week Treasury bill auction for debt maturing in the first week of June fetched a record high yield of 5.84 per cent. Treasury bills maturing between June 1 and 13 are trading at far higher yields than those maturing earlier and later.

In another sign of shocks, the cost of insuring US debt through the credit default swap market has risen to a record high.

Yellen’s latest warning comes on the eve of a meeting at the White House involving US President Joe Biden and Republican Speaker of the House Kevin McCarthy.

The pair are expected to gather at the White House on Tuesday with Senate Minority Leader Mitch McConnell, Senate Majority Leader Chuck Schumer and House Minority Leader Hakeem Jeffries, as congressional leaders and staffers try to defuse a crisis. do what Yellen predicted could be “disastrous”. Global Economy.

Meanwhile, Securities and Exchange Commission Chairman Gary Gensler said Monday that a default would be “unimaginable,” comparing it to the prospect of a “raging fire.”

“You will see a breakdown in all markets,” he told a conference organized by the Atlanta Fed, adding that businesses and homeowners would be hit by higher borrowing costs. “It’ll be a mess.”

Biden and congressional leaders first met last week to talk about the debt ceiling, but the meeting originally scheduled for last Friday was postponed after staffers said they needed more time to negotiate. Time is needed.

The White House and congressional Democrats have sought a “clean” bill to raise the debt ceiling without preconditions, while Republicans want to tie a higher borrowing limit to spending cuts.

Over the weekend, people told talks about a deal taking shape that would limit household spending for several years. Such a deal could include claw-back of unspent coronavirus pandemic relief funds and speeding up the permitting process for large investment projects, the people said.

Biden said Sunday that he is “optimistic” that a deal can be reached. “It’s never a good idea to paint a conversation in the middle of a conversation. I’m an optimist because I’m a born optimist.”

“But I really think there is a desire on their part and on our part to reach an agreement. And I think we will be able to do that.”

McCarthy has been far more vulnerable in his public comments. On Sunday he said the two sides were still “far apart”.

“It sounds like they want to show up in a meeting, but they’re not talking about anything serious. It’s like they want more of a default than a deal for me.”