Abstract
We use information on new sovereign debt issues in the euro area to explore the drivers behind the debt maturity decisions of governments. We set up a theoretical model for the maturity structure that trades off the preference for liquidity services provided by short-term debt, roll-over risk and price risk. The average debt maturity is negatively related to both the level and the slope of the yield curve. A panel VAR analysis shows that positive shocks to risk aversion, the probability of non-repayment and the demand for the liquidity services of short-term debt all have a positive effect on the yield curve level and slope, and a negative effect on the average maturity of new debt issues. These results are partially in line with our theory. A forecast error variance decomposition suggests that changes in the probability of non-repayment as captured by the expected default frequency extracted from credit default spreads are the most important source of shocks.
Highlights
One of the most important choices sovereign debt managers face is the maturity structure of the outstanding stock of debt
The recent euro-area debt crisis has brought public debt management to the forefront of the media and the public debate, as it showed the risks associated with high amounts of sovereign debt to be rolled over
In this paper we have investigated the determinants of the maturity structure of euro-area sovereign debt over the period since the inception of the EMU
Summary
One of the most important choices sovereign debt managers face is the maturity structure of the outstanding stock of debt. We perform a panel VAR analysis that shows that positive shocks to risk aversion, the expected probability of non-repayment and the demand for the liquidity services of short debt all raise the level and the slope of the yield curve, while reducing the weighted average maturity of new debt. Our analysis differs in various ways from previous work by (i) constructing a theoretical framework that combines shocks to risk preferences, fiscal risk and the demand for the liquidity services of short debt, which allows us to analyze the trade-offs among price risk of long-term debt, the provision of the liquidity services by short safe debt and roll-over risks associated with short debt, and (ii) exploring the consistency of the model’s predictions with the empirical relationship between the maturity of newly-issued Eurozone debt and the yield curve, as well as with the factors driving both debt maturity and the yield curve.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
