Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/324802 
Year of Publication: 
2025
Series/Report no.: 
Working Paper No. WP 2025-07
Publisher: 
Federal Reserve Bank of Chicago, Chicago, IL
Abstract: 
We examine the 2025 U.S. debt limit episode through the lens of financial markets. First, we document an increase in trading activity in the U.S. sovereign CDS market, and we infer a probability of default from CDS premiums. We find that default risk reached 1% by the November 6 Presidential election, fell quickly after that, and progressively climbed back up in subsequent months to the current 1.1% level. Overall, these estimates are well below the default risk estimates for the debt-limit episodes of 2011, 2013, and 2023, which range from 4% to 6%. Second, so far we only find small distortions in the market for Treasury bills that mature around the "X-date," when Treasury is expected to extinguish its existing resources, and thus would be most affected by a hypothetical default. This is in contrast with the 2023 episode, when bills maturing around the X-date traded with a yield that was about 1% higher than those maturing in other months. Third, we discuss the broader consequences that debt-limit events can have for the level of bank reserves at the Federal Reserve, and their implications for money markets liquidity.
Subjects: 
default
sovereign CDS
default probabilities
U.S
CDS
debt limit
JEL: 
G10
G12
G18
G28
E32
E43
E44
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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