May 2017

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

David Cashin, Erin Syron Ferris, Beth Klee, and Cailey Stevens


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.

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Keywords: Debt Limit, Financial contagion, Political uncertainty, Treasury Yields


PDF: Full Paper

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Last Update: January 09, 2020