Are Treasury Securities Free of Default?

Srinivas Nippani, Pu Liu and Craig T. Schulman

Journal of Financial and Quantitative Analysis, 2001, vol. 36, issue 2, 251-265

Abstract: The chain of events that led to the disagreement between the White House and Congrees over the increase of the federal debt limit from mid-October 1995 to March 1996 caused a default potential for Treasury securities. We examine the effect of this event chain on the yield spread between commercial paper and Treasury bills and find that both the three-and six-month yield spreads were reduced during the event period. The results suggest that the market charged a default risk premium to the Treasury securities. There is no evidence that these events had a sustained effect on T-bill rates since the yield spread during the post-event period resumed its pre-event level.

Date: 2001
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