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Are Treasury Securities Free of Default?

Published online by Cambridge University Press:  06 April 2009

Abstract

The chain of events that led to the disagreement between the White House and Congrees over the increase of the federal debt limit from mid-October 1995 to March 1996 caused a default potential for Treasury securities. We examine the effect of this event chain on the yield spread between commercial paper and Treasury bills and find that both the three-and six-month yield spreads were reduced during the event period. The results suggest that the market charged a default risk premium to the Treasury securities. There is no evidence that these events had a sustained effect on T-bill rates since the yield spread during the post-event period resumed its pre-event level.

Type
Research Article
Copyright
Copyright © School of Business Administration, University of Washington 2001

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Footnotes

*

Nippani, School of Business, University of Arkansas of Monticello, Monticello, AR 71656; Liu, Finance Department, and Schulman, Department of Economics, Sam M. Walton College of Business Administration, University of Arkansas, Fayetteville, AR 72701. We thank Louis Ederington, Wayne Lee, Glenn Boyle, Jon Karpoff (the editor), and Avi Kamara (associate editor and referee) for helpful comments. We also thank Christine Noonan at Moody's Investors Service for providing information on Moody's ration actions on Treasury securities.

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