DP13729 The Maturity of Sovereign Debt Issuance in the Euro Area

Author(s): Roel Beetsma, Frank de Jong, Massimo Giuliodori, Jesper Hanson
Publication Date: May 2019
Date Revised: March 2020
Keyword(s): euro-area public debt auctions, expected repayment probability, liquidity services of short debt, Maturity, risk aversion, yield curve
JEL(s): E62, G11, G12, G18
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13729

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.