Debt Ceiling: Short-term Treasury yields nearly triples due to debt limit brinksmanship

Treasury Secretary Jack Lew testified before the Senate Finance Committee on the debt limit on Oct. 10, 2013. SOURCE:

Yields for 4-week U.S. Treasury securities have tripled during the past week due to growing market uncertainty on whether Congress will raise the debt ceiling in time to avoid a government default.

“The uncertainty around raising the debt limit is beginning to stress financial markets. In our auction of four-week Treasury bills on Tuesday, the interest rate nearly tripled relative to the prior week’s auction and have reached the highest levels since October 2008,” said Treasury Secretary Jack Lew at the Senate Finance Committee on Thursday.

Read more: Spotlight: Debt Limit 2013

Because of growing concerns over the debt ceiling impasse, investors are now charging the U.S. government higher interest rates, up from 0.10% on Oct. 1st to 0.26% on Oct. 10th. That’s a significant hike compared to last month’s Treasury yields, which hovered between 0.01% to 0.04%.

Lew estimated that the recent spike in interest rates are adding “billions of dollars” to the federal deficit.

“If the cost of borrowing goes up, it raises our expenditures. It doesn’t reduce them,” said Lew. “Unless we were to do something unthinkable and say we will never pay those bills, you’ve got to pay the bills and you’ve got to be borrowing money at a higher interest rate. So it only costs.”

The impact of higher interest rates won’t be limited to just the federal government. Families and businesses around the country will see increases in borrowing costs as well.

“I would just add that higher interest rates also flow through the economy in terms of higher mortgage rates and higher student loan interest rates. So the costs have multiple levels of impact on real people,” said Lew. “We still have access to the credit markets but it’s more expensive and for no reason. It could be resolved by just settling this issue and making it clear that the debt limit will not be breached and we don’t have any problems.”

Lew emphasized that “the only way to avoid inflicting further damage to our economy is for Congress to act” and raise the debt ceiling as soon as possible.

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