Strategy and tactics in Public Debt Management

We examine under which conditions on short- and long-term interest rates the debt manager could opt to rely temporarily on a maturity mix of securities which is different from the one reckoned as optimal in the steady state. The study is partly motivated by the apparent ‘window of opportunity’ to issue more heavily at longer maturities given the recent historically low levels exhibited by yields, a view often upheld by rules of thumb which however ignore a number of potentially relevant factors. By developing a simple CAPM model for debt management we show that the region for long tactical positions on the long-term bond is actually narrower than that predicted by such rules. Once the model is augmented to relax two tenets of standard CAPM (price-taking and no transaction costs), the room of manoeuvre for tactical position shrinks further. Finally, we interpret the model results in terms of the principal-agent dilemma and discuss some financial stability implications arising from the public debt issuance choices.