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

53 Pages Posted: 22 May 2017  

David B. Cashin

Board of Governors of the Federal Reserve System

Erin E. Syron Ferris

Board of Governors of the Federal Reserve System

Elizabeth Klee

Board of Governors of the Federal Reserve System

Cailey Stevens

Board of Governors of the Federal Reserve System

Date Written: 2017-05

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

Suggested Citation

Cashin, David B. and Syron Ferris, Erin E. and Klee, Elizabeth and Stevens, Cailey, Take it to the Limit: The Debt Ceiling and Treasury Yields (2017-05). FEDS Working Paper No. 2017-052. Available at SSRN: https://ssrn.com/abstract=2970939 or http://dx.doi.org/10.17016/FEDS.2017.052

David B. Cashin (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Erin E. Syron Ferris

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Elizabeth Klee

Board of Governors of the Federal Reserve System ( email )

20th and Constitution Ave NW
Washington, DC 20551
United States

Cailey Stevens

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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