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

48 Pages Posted: 9 Jul 2021

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 C. Klee

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: January, 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.

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

Suggested Citation

Cashin, David B. and Syron Ferris, Erin and Klee, Elizabeth C., Treasury Safety, Liquidity, and Money Premium Dynamics: Evidence from Recent Debt Limit Impasses (January, 2020). FEDS Working Paper No. 2020-8, Available at SSRN: https://ssrn.com/abstract=3877008 or http://dx.doi.org/10.17016/FEDS.2020.008

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 C. Klee

affiliation not provided to SSRN

No Address Available

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