Are Treasury Securities Free ofDefault?

Abstract

The chain of events that led to the disagreementbetween the White House and Congrees over theincrease of the federal debt limit from mid-October1995 to March 1996 caused a default potential forTreasury securities. We examine the effect of thisevent chain on the yield spread between commercialpaper and Treasury bills and find that both thethree-and six-month yield spreads were reducedduring the event period. The results suggest thatthe market charged a default risk premium to theTreasury securities. There is no evidence that theseevents had a sustained effect on T-bill rates sincethe yield spread during the post-event periodresumed its pre-event level.