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
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.
Cite this item
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.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
Keywords: Debt limit ; Financial contagion ; Political uncertainty ; Treasury yields
This item with handle RePEc:fip:fedgfe:2017-52
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