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.
File(s): File format is application/pdf https://www.federalreserve.gov/econres/feds/files/2017052pap.pdf
Part of Series: Finance and Economics Discussion Series
Publication Date: 2017-05
Pages: 52 pages