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The increasing default risk of US Treasury securities due to the financial crisis

Listed author(s):
  • Nippani, Srinivas
  • Smith, Stanley D.
Registered author(s):

    This paper examines the impact of the current financial crisis on long-term US Treasury yields by testing the impact of a series of events from December 2007 to March 2009 on the spread between 10-year USD LIBOR swap and 10-year US Treasury (constant maturity) rates to measure risk associated with Treasuries. Controlling for the liquidity of the two markets, the default risk of the swap, and the net foreign purchases of Treasury securities, we find that 13 of the tested 20 events have significantly negative coefficients. We conclude that the lower spread is consistent with greater default risk for US Treasury securities.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378-4266(10)00131-7
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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 10 (October)
    Pages: 2472-2480

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:10:p:2472-2480
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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    1. Liu, Pu & Shao, Yingying & Yeager, Timothy J., 2009. "Did the repeated debt ceiling controversies embed default risk in US Treasury securities?," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1464-1471, August.
    2. Mardi Dungey & Charles Goodhart & Demosthenes Tambakis, 2008. "The US treasury market in August 1998: untangling the effects of Hong Kong and Russia with high-frequency data," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 40-52.
    3. Jagadeesh Gokhale & Kent Smetters, 2005. "Measuring Social Security’s Financial Problems," Working Papers wp093, University of Michigan, Michigan Retirement Research Center.
    4. Landschoot, Astrid Van, 2008. "Determinants of yield spread dynamics: Euro versus US dollar corporate bonds," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2597-2605, December.
    5. Nippani, Srinivas & Liu, Pu & Schulman, Craig T., 2001. "Are Treasury Securities Free of Default?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(02), pages 251-265, June.
    6. Bonfim, Diana, 2009. "Credit risk drivers: Evaluating the contribution of firm level information and of macroeconomic dynamics," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 281-299, February.
    7. Joseph G. Haubrich, 2001. "Swaps and the swaps yield curve," Economic Commentary, Federal Reserve Bank of Cleveland, issue Dec.
    8. Zivney, Terry L & Marcus, Richard D, 1989. "The Day the United States Defaulted on Treasury Bills," The Financial Review, Eastern Finance Association, vol. 24(3), pages 475-489, August.
    9. Kotomin, Vladimir & Smith, Stanley D. & Winters, Drew B., 2008. "Preferred habitat for liquidity in international short-term interest rates," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 240-250, February.
    10. Claessens, Stijn & Demirgüç-Kunt, AslI & Moshirian, Fariborz, 2009. "Global financial crisis, risk analysis and risk measurement," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 1949-1952, November.
    11. Anjan V. Thakor, 2006. "Commentary on "Is the United States bankrupt? "," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 251-258.
    12. Chen, Shiu-Sheng, 2009. "Predicting the bear stock market: Macroeconomic variables as leading indicators," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 211-223, February.
    13. Laurence J. Kotlikoff, 2006. "Is the United States bankrupt?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 235-250.
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