The Interest Rate Effects of Government Debt Maturity

52 Pages Posted: 20 Jun 2013

See all articles by Jagjit S. Chadha

Jagjit S. Chadha

University of St. Andrews - School of Management

Philip Turner

Bank for International Settlements (BIS) - Monetary and Economic Department

Fabrizio Zampolli

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: June 2013

Abstract

Federal Reserve purchases of bonds in recent years have meant that a smaller proportion of long-dated government debt has had to be held by other investors (private sector and foreign official institutions). But the US Treasury has been lengthening the maturity of its issuance at the same time. This paper reports estimates of the impact of these policies on long-term rates using an empirical model that builds on Laubach (2009). Lowering the average maturity of US Treasury debt held outside the Federal Reserve by one year is estimated to reduce the five-year forward 10-year yield by between 130 and 150 basis points. Such estimates assume that the decisions of debt managers are largely exogenous to cyclical interest rate developments; but they could be biased upwards if the issuance policies of debt managers are not exogenous but instead respond to interest rates. Central banks will face uncertainty not only about the true magnitude of maturity effects, but also about the size and concentration of interest rate risk exposures in the financial system. Nor do they know what the fiscal authorities and their debt managers will do as long-term rates change.

Keywords: quantitative easing, sovereign debt management, long-term interest rate, portfolio balance effect

JEL Classification: E43, E52, E63

Suggested Citation

Chadha, Jagjit S. and Turner, Philip and Zampolli, Fabrizio, The Interest Rate Effects of Government Debt Maturity (June 2013). BIS Working Paper No. 415. Available at SSRN: https://ssrn.com/abstract=2282396

Jagjit S. Chadha (Contact Author)

University of St. Andrews - School of Management ( email )

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St. Andrews, Fife KY16 9SS
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HOME PAGE: http://www.st-andrews.ac.uk/economics/staff/pages/j.chadha.shtml

Philip Turner

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Fabrizio Zampolli

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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