The Management of the Brazilian Bonded Debt Maturity from 1994 to 1997

Abstract:     
Due to the high levels of uncertainty arising from high inflation, on the eve of the Real Plan Brazilian public debt was mainly composed of indexed bonds with very short maturities. As the stabilization program proved successful, it became possible to start changing the debt's composition; thus, between July 1994 and October 1997 public debt-managing authorities aimed to increase the debt's average maturity by issuing nominal securities with increasing maturities. In this paper we analyze this debt-management strategy. The underlying argument is that the increase in the debt's average maturity must lead to higher debt-financing costs, as longer-term securities pay higher interest rates. We first discuss the theoretical reasons for the higher risk premia in long securities as compared to shorter ones and show that in order to increase the proportion of long-term securities in total debt government must raise interest differentials even further. We then estimate the effects of such strategy in Brazil in the period following the Real Plan.

Number of Pages in PDF File: 55

JEL Classification: H6, H63

working papers series