Finance and Economics Discussion Series (FEDS)

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January 2020

Treasury safety, liquidity, and money premium dynamics: Evidence from recent debt limit impasses

David Cashin, Erin E. Syron Ferris, and Elizabeth Klee

Abstract:

Treasury securities normally possess unparalleled safety and liquidity and, consequently, carry a money premium. We use recent debt limit impasses, which temporarily increased the riskiness of Treasuries, to investigate the relationship between the money premium, safety, and liquidity. Our results shed light on Treasury market dynamics specifically, and debt more generally. We first establish that a decline in the perceived safety of Treasuries erodes the money premium at all times. Meanwhile, changes in liquidity only affected the money premium during the impasses. Next, we show that Treasury safety and liquidity dynamics are generally consistent with the theory of the information sensitivity of debt.

Accessible materials (.zip)

DOI: https://doi.org/10.17016/FEDS.2020.008

PDF: Full Paper

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Last Update: August 11, 2020