Janet Yellen warns of jump in US borrowing costs amid debt ceiling stand-off

Janet Yellen warned the stand-off over the debt ceiling has resulted in a jump in government borrowing costs, as the Treasury secretary doubled down on predictions the US risks running out of cash as early as June 1.

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

She also reiterated her estimate from 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 lawmakers lift the borrowing limit.

Yields on short-term Treasury bills that mature next month have risen as the debt ceiling impasse has dragged on, reflecting mounting concerns among investors about the prospects for a default. Investors avoided US government bonds maturing around the X-date, forcing the Treasury to pay higher rates at auctions.

In early May, the four-week Treasury bill auction for debt maturing in the first week of June hit 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 coming due before and after.

In a further sign of jitters, the costs to insure US debt via the credit default swap market has soared to a record high.

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

The pair are expected to gather on Tuesday with Senate minority leader Mitch McConnell, Senate majority leader Chuck Schumer and House minority leader Hakeem Jeffries as the White House, congressional leaders and staffers try to avert a crisis that Yellen has predicted could be “catastrophic” for the global economy.

Meanwhile, Gary Gensler, chair of the Securities and Exchange Commission, said on Monday that a default would be “unimaginable”, likening the possibility to a “raging fire”.

“You’d see breakdowns all through the markets,” he said at a conference hosted by the Atlanta Fed, adding that businesses and homeowners would be hit with higher borrowing costs. “It’d be one heck of a mess.”

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

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

At the weekend, people briefed on the talks said a deal was taking shape that would limit domestic spending for several years. Such a deal could also include a clawing-back of unspent coronavirus pandemic relief funds and a speeding-up of the permitting process for big investment projects, the people said.

Biden on Sunday said he was “optimistic” that a deal could be reached. “It’s never good to characterise a negotiation in the middle of the negotiations. I remain optimistic because I am a congenital optimist,” the president told reporters near his house in Rehoboth Beach, Delaware.

“But I really think there is a desire on their part as well as ours to reach an agreement. And I think we’ll be able to do it.”

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

“It just seems like they want to look like they are in a meeting, but they are not talking anything serious. It seems more like they want a default than a deal to me.”