Finance and Economics Discussion Series (FEDS)

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May 2017

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

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

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.

Accessible materials (.zip)

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

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

PDF: Full Paper

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Last Update: January 09, 2020