Take it to the Limit : The Debt Ceiling and Treasury Yields

Cashin, David B.; Ferris, Erin E. Syron; Klee, Elizabeth C.; Stevens, Cailey

doi:10.17016/FEDS.2017.052

Working Paper

Take it to the Limit : The Debt Ceiling and Treasury Yields

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.

Keywords: Debt limit; Financial contagion; Political uncertainty; Treasury yields;

JEL Classification: G12; G18; H63;

https://doi.org/10.17016/FEDS.2017.052