Take it to the Limit: The Debt Ceiling and Treasury Yields
53 Pages Posted: 22 May 2017
Date Written: 2017-05
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: Suggested Citation