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Janet Yellen Warns US Default Would Trigger Crisis, Recession As Debt Deadline Looms

Failure to lift the $28.4 trillion debt ceiling this week could put the U.S. at risk of default as early as October 18, Treasury Secretary Janet Yellen told Senate lawmakers Tuesday.

U.S. Treasury Secretary Janet Yellen said a default linked to a failure to raise the debt ceiling would be a 'manufactured crisis' that could tip the economy into recession.

Speaking to the Senate Banking Committee's revue of both the Treasury Department and Federal Reserve's economic response to the coronavirus pandemic, Yellen told lawmakers that the U.S. would effectively run out of cash to meet its borrowing obligations by October 18 if the $28.4 trillion debt ceiling isn't lifted by the end of this month, triggering a self-inflicted wound of "enormous proportions" on the world's biggest economy.

"It is imperative that Congress address the debt limit. If not, our current estimate is that Treasury will likely exhaust its extraordinary measures by October 18," Yellen said. "At that point, we expect Treasury would be left with very limited resources that would be depleted quickly. America would default for the first time in history."

"The full faith and credit of the United States would be impaired, and our country would likely face a financial crisis and economic recession as a result," she added.

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Benchmark 10-year note yields, which move in the opposite direction to Treasury bond prices, traded at the highest levels since January in early Tuesday trading and were last seen changing hands at 1.545%.

A poorly-received auction of $60 billion in 2-year notes yesterday -- which drew the weakest demand levels since 2008 amid a plunge in foreign buyers -- underscored the risked linked to debt ceiling negotiations and a pending government shutdown and sent yield surging to 18-month highs in early Tuesday trading of 0.317%.

Late Tuesday, Senate lawmakers voted largely on partisan lines as a Democrat move to pass legislation aimed at both funding the government beyond the September 30 deadline while raising the debt limit failed to find any support among Republicans. 

"For the record, remember that the debt ceiling merely authorizes the Treasury to borrow in order to finance previous spending and taxation decisions taken by Congress," said Ian Shepherdson of Pantheon Macroeconomics. "It is of no economic significance, unless Congress fails to raise or re-suspend it, thereby triggering a default, which most definitely would have severe macroeconomic consequences."