Cost of Insuring U.S. Debt Explodes to a Two-Year High

With the deadline to raise the debt ceiling only days away, Republican lawmakers are still scrambling to put together their deficit-cutting plan despite opposition on all sides, and with continued delays so close to August 2, the cost of insuring U.S. debt (NYSE:TLT) against default has risen to its highest level in over two years. Five-year credit default swaps (CDS) on government debt climbed 67 basis points Friday, to their highest level since March 2009.

Related Feature: Here Are Obama’s Options If the Debt Ceiling Is Not Raised.

China’s (NYSE:FXI) state-run news agency Xinhua has criticized U.S. lawmakers for having “kidnapped” the U.S. economy with their “dangerously irresponsible” politics. China is the largest holder of U.S. debt, and dollar investments are estimated to account for about 70% of China’s $3.2 trillion in foreign exchange reserves.

While House Speaker Boehner rushes to prepare a plan and rally support within his own party, the $900 billion in cuts it would offer, as well as the relatively small and short-term debt ceiling hike, are sure to be rejected by the Democrat-controlled Senate. So far, Boehner has been unable to secure enough of the conservative vote within his own house, weakening his ability to be taken seriously in negotiations. House Republicans will meet Friday at 10 a.m. to discuss their next move after large opposition to Boehner’s plan forced him to cancel Thursday night’s vote.

Democrat Harry Reid, majority leader of the Senate, is pushing to raise the debt ceiling by enough to delay another crisis until after the November 2012 elections. On Thursday, he indicated that he might advance his own bill that would cut $2.2 trillion from the budget over the next 10 years.

Meanwhile, with Congress seemingly at a stalemate, the economy has been crumbling around them. Just last week, most were assured that a deal would come to fruition, but every day closer to August 2, that seems less and less likely, and it’s taking its toll. The dollar fell (NYSE:UDN) to a four-month low against the yen, and near a record low against the Swiss franc (NYSE:FXF) today. U.S. stock futures fell 0.5%, and Wall Street got a weak start.