Recent evidence on political brinkmanship and Treasury yields

• Published in: Journal of financial economic policy 2017-01, Vol.9 (3), p.324-337
• Main Authors: Nippani, Srinivas, Parnes, Dror
• Format: Article
• Language: English
• Subjects: Avoidance behavior; Bills of exchange; Brinkmanship; Companies; Credit ratings; Default; Deficit financing; Elections; Expenditures; Federal budget; Federal government; Foreign exchange; Foreign exchange markets; Foreign exchange rates; Good news; Government shutdowns; Hypotheses; Interest rate risk; Interest rates; Legislatures; Literature reviews; Macroeconomics; Market value; Maturity; Money markets; Motivation; News; Payments; Political parties; Politics; Prices; Rating services; Resignations; Risk; Risk premiums; Savings; Securities; Securities markets; Short term; Taxation; Trade; Treasuries; Treasury bills; Word processing equipment
• ISSN: 1757-6385; 1757-6393
• DOI: 10.1108/JFEP-01-2017-0001

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 e