Take it to the Limit: The Debt Ceiling and Treasury Yields
David B. Cashin,
Erin E. Syron Ferris,
Elizabeth Klee and
No 2017-052, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)
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.
Keywords: Debt limit; Financial contagion; Political uncertainty; Treasury yields (search for similar items in EconPapers)
JEL-codes: G12 G18 H63 (search for similar items in EconPapers)
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