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

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  • Nippani, Srinivas
  • Smith, Stanley D.

Abstract

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.

Suggested Citation

  • Nippani, Srinivas & Smith, Stanley D., 2010. "The increasing default risk of US Treasury securities due to the financial crisis," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2472-2480, October.
    • Handle: RePEc:eee:jbfina:v:34:y:2010:i:10:p:2472-2480
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    3. Dungey, Mardi & Hvozdyk, Lyudmyla, 2012. "Cojumping: Evidence from the US Treasury bond and futures markets," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1563-1575.
    4. Hsu, Feng-Jui & Chen, Sheng-Hung, 2021. "US quantitative easing and firm’s default risk: The role of Corporate Social Responsibility (CSR)," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 650-664.
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    6. Contessi, Silvio & De Pace, Pierangelo & Guidolin, Massimo, 2014. "How did the financial crisis alter the correlations of U.S. yield spreads?," Journal of Empirical Finance, Elsevier, vol. 28(C), pages 362-385.
    7. Bagliano, Fabio C. & Morana, Claudio, 2012. "The Great Recession: US dynamics and spillovers to the world economy," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 1-13.
    8. C. Sirmans & Stanley Smith & G. Sirmans, 2015. "Determinants of Mortgage Interest Rates: Treasuries versus Swaps," The Journal of Real Estate Finance and Economics, Springer, vol. 50(1), pages 34-51, January.
    9. Sekkel, Rodrigo, 2011. "International evidence on bond risk premia," Journal of Banking & Finance, Elsevier, vol. 35(1), pages 174-181, January.
    10. Goodness C. Aye & Frederick W. Deale & Rangan Gupta, 2016. "Does Debt Ceiling and Government Shutdown Help in Forecasting the US Equity Risk Premium?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 63(3), pages 273-291, June.
    11. Aboody, David & Hughes, John S. & Bugra Ozel, N., 2014. "Corporate bond returns and the financial crisis," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 42-53.
    12. He, Zhen & O’Connor, Fergal & Thijssen, Jacco, 2022. "Identifying proxies for risk-free assets: Evidence from the zero-beta capital asset pricing model," Research in International Business and Finance, Elsevier, vol. 63(C).
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    15. Chevallier, Julien, 2012. "Global imbalances, cross-market linkages, and the financial crisis: A multivariate Markov-switching analysis," Economic Modelling, Elsevier, vol. 29(3), pages 943-973.

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