Treasury Safety, Liquidity, and Money Premium Dynamics: Evidence from Recent Debt Limit Impasses

48 Pages Posted: 14 May 2020

See all articles by David B. Cashin

David B. Cashin

Board of Governors of the Federal Reserve System

Erin Syron Ferris

Board of Governors of the Federal Reserve System

Elizabeth Klee

Board of Governors of the Federal Reserve System

Date Written: January 31, 2020

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.

Keywords: Treasury securities; Money premium; Default risk; Liquidity; Information sensitivity of debt

JEL Classification: E43; E63; G12; G14; G18; H63

Suggested Citation

Cashin, David B. and Syron Ferris, Erin and Klee, Elizabeth, Treasury Safety, Liquidity, and Money Premium Dynamics: Evidence from Recent Debt Limit Impasses (January 31, 2020). FEDS Working Paper No. 2020-008 https://doi.org/10.17016/FEDS.2020.008 , Available at SSRN: https://ssrn.com/abstract=3600402

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 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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
8
Abstract Views
91
PlumX Metrics