Recent evidence on political brinkmanship and Treasury yields

Abstract

Purpose This paper aims to analyze how political brinkmanship impacted Treasury yields during the debt ceiling debate in 2015. The results show that the resignation of the House Speaker John A. Boehner caused a significant decrease in Treasury bill yields of one- and three-month maturities. The authors robust analysis indicates that these lower yields have saved US taxpayers several billion dollars in extra tax expenses. This paper provides evidence that lack of political brinkmanship can be very advantageous for the taxpayers. This has considerable implications for lawmakers in this post-election year. Design/methodology/approach The authors examine the differences in yields between equal maturity short-term Treasury securities and commercial paper using t-tests, non-parametric tests and a robust regression model based on earlier empirical studies. Findings This study provides evidence indicating that between September 25, 2015, and up to October 30, 2015, relatively lower Treasury yields resulted from the lack of political brinkmanship, and this has saved the US taxpayers several billion dollars in interest expenses in 2015. Research limitations/implications The study showed that lower yields will result from a lack of political brinkmanship, and this resulted in savings of several billions of dollars in interest payments. Considering that both the White House and Congress will be controlled by the same political party, this gives lawmakers a unique opportunity to have less acrimonious debt ceiling debates. The limitation of the study is that it does not consider the impact on foreign exchange markets and other factors which could play a major role. Practical/implications Unlike earlier scenarios where default risk increased, followed by credit rating downgrades, there was a quiet confidence this time about a quick resolution. Markets were stable, and this allowed money market participants to invest more confidently even when an upcoming debt ceiling debate is on. Corporations that invested additional cash in money markets for short-term could do it more confidently at that time without fear of default or interest rate risk which could potentially harm the market value of their investments. Practical/implications It implies that there will be lower taxpayer costs because of debt ceilings and avoidance of shutdowns of the federal government. It also implies that there could be more confidence in the dollar. Originality/value Several earlier studies have examined Treasury default caused by political brinkmanship. This is the first study to examine an event where political brinkmanship appeared possible and then suddenly dissipated in a single day. Political brinkmanship is bad news because it increases taxpayer interest burden as seen from several of the studies above. Therefore, it should be considered good news if no disagreement is evident. This argument serves as our motivation for this paper. As an increase in the chances of default causes an increase in the yield of Treasury bills as earlier studies showed, a decrease in the chance of default caused Treasury bill yields to be that much lower based on the results of this study.

Прямые И Косвенные Инвестиции: Последствия Выбора Для Частного Краткосрочного Инвестора

“…Thus, the higher are the interest rates, the higher is the opportunity costs of holding money, and the more T-bills the investors are willing to buy (Nagel, 2014). However, this is not the only one correlation: Nippani and Parnes (2017) found that political brinkmanship and the consequent delays in passing the debt limit reduce the T-bills' price, which leads to increased yields. Thus, the more unstable the political situation in the U.S.A is, the better is for private investors, but worse for the taxpayers.…”

Analysis of the Exchange Rate in Peru Between January 2020 and December 2021

“…On the other hand, the minimum rate (or floor rate) consists of the Central Reserve Bank buying dollars to maintain the exchange rate at that value. This rate varies every day, which will depend on the slope of the exchange rate band (Lukongo & Miller, 2018;Nippani & Parnes, 2017).…”