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Working Paper
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 ...
Working Paper
The 2025 U.S. Debt Limit Through the Lens of Financial Markets
We examine the 2025 U.S. debt limit episode through the lens of financial markets. First, we document an increase in trading activity in the U.S. sovereign CDS market, and we infer a probability of default from CDS premiums. We find that default risk reached 1% by the November 6 Presidential election, fell quickly after that, and progressively climbed back up in subsequent months to the current 1.1% level. Overall, these estimates are well below the default risk estimates for the debt-limit episodes of 2011, 2013, and 2023, which range from 4% to 6%. Second, so far we only find small ...