Working Paper

Take it to the Limit : The Debt Ceiling and Treasury Yields


Abstract: We use the 2011 and 2013 U.S. debt limit impasses to examine the extent to which investors react to a heightened possibility of financial contagion. To do so, we first model the response of yields on government debt to a potential debt limit "breach." We then demonstrate empirically that yields on all Treasuries rose by 4 to 8 basis points during both impasses, while excess yields on bills at risk of delayed principal payments were significantly larger in 2013. Perhaps counterintuitively, our model suggests market participants placed a lower probability on financial contagion resulting from a breach in 2013.

Keywords: Debt limit; Financial contagion; Political uncertainty; Treasury yields;

JEL Classification: G12; G18; H63;

https://doi.org/10.17016/FEDS.2017.052

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2017-05

Number: 2017-052