Federal Reserve Chairman Ben S. Bernanke told Congress today that a failure by Congress to raise the nation's $14.3 trillion debt limit would lead to a "major crisis" and throw "shock waves" through the financial system. Bernanke responded to a question at a House Financial Services Committee hearing.

Yields Low

Government bond yields are at about the lowest this year even as U.S. politicians haggle over the federal debt ceiling. Ten-year Treasuries yielded 2.94 percent as of 10:41 New York time after falling to a low this year of 2.81 percent on July 12. That compares with an average of 7 percent during the past 4 decades. Two-year U.S. government debt yields 0.36 percent, compared with the low for 2011 of 0.32 percent on June 24.

McConnell offered little hope yesterday that leaders would reach an agreement on the debt ceiling by the necessary deadline.

"As long as this president is in the Oval Office, a real solution is unattainable," he said on the Senate floor in his toughest comments about the negotiations since the talks began. He dismissed Obama's call to lower the deficit by $4 trillion over the next 10 to 12 years as "smoke and mirrors."

Three Stages

McConnell's proposal to let Obama increase the debt limit in three stages, while requiring him to propose offsetting spending cuts, offered a potential path out of the impasse. It also signals that the issue may loom during next year's election campaign if Congress must take additional votes on the debt.

The idea demonstrates movement toward "a coming together of the two sides," said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees about $80 billion in assets. "Maybe not the solution we were looking for, but at least it's an aversion of the D-Day mess."

Chris Rupkey, managing director and chief Financial Economist at Bank of Tokyo-Mitsubishi UFJ in New York, said investors "don't feel the debt ceiling talks have crossed the end zone yet."

McConnell's willingness to let the ceiling be raised "does not mean it is a done deal yet," Rupkey said in an e-mail today. A "three-stage debt ceiling increase by the president sounds like a rocket that is not going to get off the ground."

Ethan Siegal, who tracks Washington policy for institutional investors, said McConnell's plan adds to "the market's already decided certainty" that there will be some resolution that prevents a default of government obligations.

"Investors firmly believe it's going to get done," said Siegal, who is president of the Washington Exchange.

Gingrich Sees 'Surrender'