To shorten or to lengthen? Public debt management in the low interest rate environment

With still large government debt and interest payments in many OECD countries, actively adjusting debt maturity can help to minimise debt servicing costs. Temporarily lengthening the maturity of new debt issuance may lower debt servicing costs in the longer term and reduce rollover risks if interest rates increase gradually over a prolonged period and to a high level. However, if market interest rates increase fast and stay high, shortening debt maturity would be financially more beneficial though at the cost of higher rollover risks. Illustrative scenarios considered in this paper show that adjusting debt maturity may take several years before producing fiscal savings. They are likely to be moderate at best for most G7 countries, ranging from less than 0.1% to ⅓ per cent of GDP per year on average, with the exception of Italy where they could be significantly higher. In countries where debt maturity management has small fiscal effects, lengthening the debt maturity may still be pursued to reduce rollover risks.