The Study On The US Treasury Securities’ Default Risk

As the subprime crisis started in2008, a severe financial crisis swept up theentire world. As the world-wide depression maintains its footing, debt crisis becameprevalent in many countries, and the impact to the economy remains. In order tominimize the negative influence from the financial crisis and to resolve the long-termdeficit problems, the US government continues to issue treasury securities. China,which holds1.16billion US dollars of US treasury securities, is the largest foreignholder of US treasury securities. For a long time, the US treasury securities have beenconsidered to be “default risk free”. But after so many events took place, people arebeginning to question whether it is still risk free. These events included morecountries being in a debt crisis, the failure of the US government’s bailout policies,the increasing deficit of the government for years, the deficit of the trade betweenChina and the US, the rise of the debt ceiling, the decreasing creditworthiness of theUS treasury securities and so on. Moreover, there are scholars insisting that issuingUS treasury securities is a “Ponzi scheme”, and the US treasury will defaulteventually. Therefore, studying of the default risk of the US treasury bonds during thefinancial crisis is very important to both the stability of the world’s economy and thesafety of China’s foreign exchange reserves.In the introduction, the concepts of fixed-income bonds, financial crisis and thedefault risk were discussed; the research conducted by domestic and foreign scholarsto study the fixed-income securities and debt default risk of the relevant outcomeshave been reviewed; and also described the contents, structure and features of thispaper. In the second chapter, a series of concepts including fixed income securities,treasury bonds, financial crisis were discussed, with an emphasis on the theories,models of measuring default risk of the treasury securities. The third chapterdescribes the operation of the US bond market and the size of the US treasury yieldand analyzes the existing integrated risk of the US treasury securities. It alsodescribes and analyzes the structure and risk for China’s ownership of large quantitiesof US treasury securities from the perspective of foreign exchange reserves. In thefourth chapter, a multivariable linear regression model is set, and empirical analysis isprovided, which analyze the correlation between the events that occurred in thefinancial crisis and the default risk. Finally, according to the empirical results, the paper comes to the conclusion that the actions US government took in response to thefinancial crisis did not decrease default risk, instead, these actions not only increasethis risk but also became a factor in contributing the continuation of the financialcrisis. The default risk of US treasury securities will continue to increase during thisfinancial crisis.