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Are Treasury Securities Free of Default?

Srinivas Nippani, Pu Liu and Craig T. Schulman
The Journal of Financial and Quantitative Analysis
Vol. 36, No. 2, Special Issue on International Corporate Governance (Jun., 2001), pp. 251-265
DOI: 10.2307/2676273
Stable URL: http://www.jstor.org/stable/2676273
Page Count: 15
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Are Treasury Securities Free of Default?
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Abstract

The chain of events that led to the disagreement between the White House and Congress 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.

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