Democrats and Republicans on Capitol Hill have reached an agreement to extend the US debt ceiling through to “early December”, in a stop-gap deal that will provide short-term relief to investors and executives who had fretted about the possibility of a US government default as soon as this month.

“We have reached an agreement to extend the debt ceiling through early December, and it is our hope that we can get this done as soon as today,” Chuck Schumer, the Senate’s top Democrat, told lawmakers on Thursday morning. A draft of the proposed agreement, which needs to be approved by both chambers of Congress, showed it would increase the public debt limit by $480bn.

The deal came a day after Mitch McConnell, the Republican Senate minority leader, said his party would back a short-term extension to the nation’s borrowing limit. Republicans have for months rejected Democrats’ appeals for them to sign on to raising the debt ceiling, seeking to tie the country’s existing debt to the Biden administration’s ambitious spending plans.

Earlier on Wednesday, Joe Biden leaned on corporate leaders to help the US president make the case for why Congress needed to act to raise the debt ceiling and avoid default. Janet Yellen, the Treasury secretary, had warned that the US government risked running out of money by October 18 if no deal was reached.

Cecilia Rouse, head of the White House Council of Economic Advisers, told the Financial Times on the sidelines of the OECD’s ministerial meeting in Paris this week that lawmakers risked “catastrophic” consequences if they do not find a long-term solution to the debt issue.

“If the Treasury reaches the point where it has to default on its obligations, everything is on the table . . . All the ways in which our federal government helps our economy, families and national security would be at risk,” she said.

US stocks climbed and short-term government debt that had been dumped by investors over the previous week rallied considerably late on Wednesday and on Thursday, as traders discounted the risk that the debt ceiling would affect financial markets this month.

The S&P 500 advanced 1.5 per cent in early trading on Thursday, on pace for the blue-chip benchmark’s best day since July, after Schumer’s announcement.

Yields on Treasury bills maturing on October 26 fell 0.03 percentage points to 0.04 per cent, far below the 0.14 per cent at which it had traded on Tuesday. The $4tn short-term bill market, which is a crucial source of funding for the federal government, has been closely scrutinised as the debt ceiling deadline loomed.

However, given the reprieve is only expected to last until early December, investors moved to sell Treasury bills maturing that month. The yield on bills due on December 16 jumped to 0.08 per cent, from 0.05 per cent a day previously. Yields rise when a bond’s price falls.

“The entrenched positions of both sides suggest the deal to suspend the debt ceiling until December may only delay rather than avert a crisis,” said Andrew Hunter, senior US economist at Capital Economics.

“With Republicans unlikely to offer any help beyond that, and the Democrats still insisting that they won’t use reconciliation to enact a longer-lasting debt limit increase themselves, there is a good chance we will end up in the same situation in six weeks’ time.”

McConnell has insisted that Democrats lift the debt ceiling without Republican support using a legislative manoeuvre called reconciliation, which sidesteps the 60-vote “filibuster” threshold in the 100-member Senate. But Democrats have argued that reconciliation would be too risky and time consuming and called for Republicans to allow them to proceed with a simple majority vote.

Thursday’s stop-gap measure sets up another possible showdown in the run-up to Christmas. It also follows a separate short-term agreement to fund the federal government until December 3.

If Congress does not reach a deal to continue funding the government by that date, lawmakers will once again risk a government shutdown, which would leave hundreds of thousands of federal employees out of work.

“Eleventh-hour brinkmanship is a given in light of Congress’s prior approach to the debt ceiling and while pondering the catastrophe of a default is an interesting . . . exercise, it will ultimately be an academic one,” said Ian Lyngen, a strategist with BMO Capital Markets.

Additional reporting by Chris Giles in Paris