Treasury Safety,Liquidity, and Money Premium Dynamics: Evidence from Debt Limit Impasses |
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Authors: | DAVID CASHIN ERIN E SYRON FERRIS ELIZABETH KLEE |
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Institution: | elizabeth.klee@frb.gov |
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Abstract: | Treasury securities enjoy a “money premium” because they are ultra-safe and liquid. However, during debt limit impasses, the safety and liquidity of Treasury securities temporarily deteriorate, eroding the money premium. Using past impasses, we find the money premium eroded by roughly six basis points across all Treasury securities and up to 50 basis points for the shortest maturities at the greatest risk of a delayed principal payment. Safety and liquidity each accounted for about half of the erosion. The deterioration of safety and liquidity also appears to interact, consistent with theories of default-driven liquidity risk and the information sensitivity of debt. |
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Keywords: | treasury securities money premium default risk liquidity information sensitivity of debt debt limit |
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