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To Shorten or to Lengthen? Public Debt Management in the Low-Interest Rate Environment

Introduction and main findings

In recent years, advanced economies' government bond yields have been at record-low levels, public debt has been high, and in some countries is still increasing, and gross interest payments have remained sizeable, ranging between 2% and 4% of GDP (Figure 1). In this context, lengthening the maturity of public debt may offer a way to lock in current low long-term bond yields and produce fiscal savings. Indeed, many countries have already increased the average remaining maturity of public debt in the past decade (Figure 2). With sizeable amounts of public debt maturing over the next two years (Figure 1), actively adjusting debt maturity may help to minimise debt servicing costs and contribute to maintaining debt sustainability and economic growth.

This paper outlines the main implications of changing debt maturity for debt servicing costs and presents stylised country-specific simulations for G7 economies to shed light on potential fiscal effects of an active adjustment of debt maturity.

Predicting the size and distribution over time of fiscal benefits of an active adjustment of debt maturity is complicated by uncertainty about the future evolution of yield curves and budget balances, and initial conditions related to the level and maturity structure of public debt. With the current low levels of interest rates and estimated term premia, stylised simulations for G7 countries demonstrate that a temporary lengthening of debt maturity is not likely to bring fiscal benefits, unless the pace of interest rate and term premia normalisation is sufficiently gradual and protracted. Still this reduces rollover risks. Moreover, potential fiscal gains would materialise only with a significant lag, not helping much to lower current budget deficits. In contrast, shortening permanently the debt maturity is beneficial to budgets but entails higher rollover risks. Substantial gains from actively adjusting debt maturity are likely only for countries with high debt and relatively steep yield curves like Italy (and to a much smaller extent the United States and France). In other countries, changing debt maturity does not bring significant fiscal benefits but it could still be motivated by rollover risk considerations.