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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Take it to the Limit : The Debt Ceiling and Treasury Yields
David B. Cashin
Erin E. Syron Ferris
Elizabeth C. Klee
Cailey Stevens
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.


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David B. Cashin & Erin E. Syron Ferris & Elizabeth C. Klee & Cailey Stevens, Take it to the Limit : The Debt Ceiling and Treasury Yields, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2017-052, May 2017.
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Keywords: Debt limit ; Financial contagion ; Political uncertainty ; Treasury yields
DOI: 10.17016/FEDS.2017.052
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