The media has kept the "debt ceiling battle" on the spotlight for a while. The deadline is now this coming August 2. The main point is that a default by the U.S. government is a real or credible threat, which may have long lasting consequences for the U.S. economy. If such threat and its long lasting consequences are credible, then financial markets should have already reacted in advanced. In particular, the holders of Treasury securities should have already commanded higher yield rates as a result of the increase in the default risk premium. Certainly, during July –specifically, from July 21 to July 28– there have been increases in the yield rate for Treasury securities with maturities of 1, 3, and 6 months. On July 28, the 1 year Treasury security was 1 basis point above its level on July 1. In contrast, during July the yield rates for the rest of Treasury securities –with maturities of 2, 3, 5, 7, 10, 20, and 30 years– have declined. Furthermore, Treasury yield rates across all maturities are below their level at the beginning of 2011 and their level from a year ago, except for the 20 and 30 years securities when compared to their level on July 28, 2010. –Over the past year, the federal funds rate have remained between 0 and 25 basis points; the Fed kept its bond-buying program or QE2 until a month ago; the U.S. economy has experienced slow economic activity; and inflation has not been a real concern.– In sum, if the faith on the U.S. government is on the verge of a cliff, why we do not see it in the U.S. Treasury yield curve? At most, market concerns are limited to very short term securities. Holders of U.S. Treasury securities do not believe that the “debt ceiling battle” will severely and permanently harm the faith on the U.S. government or, even if they do, U.S. sovereign debt still beats any alternative; i.e., where would current holders of U.S. Treasury securities put their money anyway?
| Daily Treasury Yield Curve Rates | |||||||||||
| Date | 1 mo | 3 mo | 6 mo | 1 yr | 2 yr | 3 yr | 5 yr | 7 yr | 10 yr | 20 yr | 30 yr |
| Jul 28, 2011 | 0.10 | 0.07 | 0.13 | 0.21 | 0.42 | 0.68 | 1.52 | 2.26 | 2.98 | 3.93 | 4.26 |
| Jul 1, 2011 | 0.01 | 0.02 | 0.10 | 0.20 | 0.50 | 0.85 | 1.80 | 2.54 | 3.22 | 4.12 | 4.40 |
| Jan 3, 2011 | 0.11 | 0.15 | 0.19 | 0.29 | 0.61 | 1.03 | 2.02 | 2.74 | 3.36 | 4.18 | 4.39 |
| Jul 28, 2010 | 0.15 | 0.15 | 0.20 | 0.30 | 0.61 | 0.95 | 1.75 | 2.43 | 3.03 | 3.86 | 4.07 |
| Source: Data from U.S. Department of the Treasury | |||||||||||
