The maturity of sovereign debt issuance in the euro area

Abstract

Highlights We model public debt maturities as a function of preference for liquidity services provided by short-term debt, roll-over risk and price risk. We construct a dataset on sovereign euro-area debt issues to explain maturity decisions of governments. Positive shocks to risk aversion, probability of non-repayment and demand for liquidity services increase yield curve level and slope. Positive shocks to risk aversion, probability of non-repayment and demand for liquidity services reduce average maturity of new debt issues. A forecast error variance decomposition shows that shocks to the non-repayment probability are quantitatively most important.

Funding Behaviour of Debt Management Offices and the ECB's Public Sector Purchase Programme

“…These works do not, however, consider the DMOs' response to changes in yields. Beetsma et al (2021) construct a theoretical model, where the public debt maturity choice depends on the liquidity services of short-term debt, roll-over risk, and credit risk. Using data for six euro area countries between 1999 and 2007 in a panel vector auto-regression framework, they find that higher risk aversion, credit risk, and demand for short-term liquid assets have negative effects on the maturity of newly issued debt.…”

Investor demand in syndicated EFSF/ESM bond issuances

“…Bonds with long tenors offer usually higher coupons at higher market risk, and many investors are entirely focused on specific tenors. Also, issuers have certain tenor preferences as it is widely discussed in the literature such as recently in Beetsma et al (2021) . Many authors suggest methods to optimise the choice of tenor in public debt management.…”