The maturity of sovereign debt issuance in the euro area

Roel Beetsma; Massimo Giuliodori; Jesper Hanson; Frank de Jong

doi:10.1016/j.jimonfin.2020.102293

The maturity of sovereign debt issuance in the euro area

J Int Money Finance. 2021 Feb:110:102293. doi: 10.1016/j.jimonfin.2020.102293. Epub 2020 Sep 28.

Authors

Roel Beetsma¹, Massimo Giuliodori², Jesper Hanson³, Frank de Jong⁴

Affiliations

¹ University of Amsterdam, European Fiscal Board, CEPR, CESifo, Netspar, Tinbergen Institute, the Netherlands.
² University of Amsterdam, Tinbergen Institute, the Netherlands.
³ International Monetary Fund and Department of Economics and Econometrics, University of Amsterdam, P.O. Box 15867, 1001 NJ Amsterdam, the Netherlands.
⁴ Department of Finance, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, the Netherlands.

Abstract

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 theoretical framework. 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.