What are the consequences of active management of average debt maturity in terms of cost and risk?

public debt
permanent working paper
Direction du Tresor Working Paper

Jean-Paul Renne


November 1, 2007

Since 2001, Agence France Trésor has been managing the average maturity of debt. In “normal” circumstances, characterised by a rising rate curve, with higher long rates and weaker but more volatile short rates, reducing this average maturity should make it possible to reduce interest costs on average over a long period, all things being equal. On the other hand, this increases the variability of this expense. Average debt maturity management therefore requires quantitative assessment of the compromise between average interest payments and payments variability. This paper aims at providing such an assessment. More precisely, the objective of the proposed approach is to compare the performances of financing strategies implying different average debt maturities. A macro-finance model is estimated on historical data and further used in order to stochastically generate future macro-finance scenarios. Each financing strategy is then applied under these scenarios, which provides us with average interest payments (cost measure) and the variability of these payments (risk measure) associated with this strategy.

Link to paper