The Maturity of Sovereign Debt Issuance in the Euro Area
52 Pages Posted: 13 May 2019 Last revised: 24 Mar 2020
Date Written: May 2019
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.
Keywords: euro-area public debt auctions, expected repayment probability, liquidity services of short debt, Maturity, risk aversion, yield curve
JEL Classification: E62, G11, G12, G18
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