It's important to remember that although related, the interest rate paid to holders of US Treasury Bonds and the rate that your bank charges you for a new mortgage, car loan or credit card are two completely different things. This entire fiasco regarding the debt ceiling has to do with Treasury bonds, NOT bank interest rates.
The first thing that will happen is a massive international selloff of US Treasury bonds of all maturities, from 30 day paper to 30 year bonds. Why would the holders want to sell? Because even if they don't, the next auction of Treasuries, when it finally comes, will see the primary dealers bid the price of the bonds DOWN through the floor. Since interest yield moves to the inverse of price with bonds, that will see a massive spike in yields, meaning buyers will demand a higher rate of return for the newer perceived risk. If you're a central bank or a sovereign wealth fund or whatever and hold a large amount of US Treasury bonds on your books, and you haven't sold the bonds you own before that happens, your balance sheet will be bleeding more red than the elevator scene in "The Shining".
It bears mentioning that the interest rates the Treasury has had to pay on their longer maturity paper over the last 15 or so years has been at a historic low. After the Great Recession started to wane and the market bottomed out in March of 2009, the rate on the 10 year (the benchmark "Risk Free Security" ) Treasury was and has stayed mostly in a range between 3 and 4%, briefly dipping down to 1% and below in 2020.
The 30 year was about a percentage point higher, for the most part.
This is exceptionally cheap money. During a portion of Reagan's term we were issuing 30 year bonds with a coupon of 10%! With yields at times spiking to 15%. We have been able to fund the absurd deficit spending the US Government has done (because they refuse to raise tax rates on the people with all the money) at very low interest rates for the last 15 years because demand for our bonds has been high. If they don't raise the ceiling that demand will evaporate.
If the Treasury is prohibited from auctioning off new debt to cover a coupon payment or to fully redeem a maturing series of notes, the news will spread worldwide in seconds and the bid prices of bonds will plummet.
It will be a financial catastrophe that will make late 2008 look like a walk in the park.
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