DP9407 Bond Market Clienteles, the Yield Curve, and the Optimal Maturity Structure of Government Debt

Author(s): Stéphane Guibaud, Yves Nosbusch, Dimitri Vayanos
Publication Date: March 2013
Keyword(s): clientele effects, debt management, government debt, interest rates, preferred habitat
JEL(s): E43, G11, G12, H21, H63
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9407

We propose a clientele-based model of the yield curve and optimal maturity structure of government debt. Clienteles are generations of agents at different lifecycle stages in an overlapping-generations economy. An optimal maturity structure exists in the absence of distortionary taxes and induces efficient intergenerational risksharing. If agents are more risk-averse than log, then an increase in the long-horizon clientele raises the price and optimal supply of long-term bonds---effects that we also confirm empirically in a panel of OECD countries. Moreover, under the optimal maturity structure, catering to clienteles is limited and long-term bonds earn negative expected excess returns.