Strategy and Tactics in Public Debt Management

Abstract

We examine the public debt management problem with respect to the maturity mix of new issues in a mean-variance framework. After identifying the main determinants of the long-run target (strategy), we focus on which interest rate conditions allow for a temporary deviation (tactics). The study is partly motivated by the apparent ‘window of opportunity’ to issue more heavily at longer maturities given the recent historically low yields. We show that the room for long tactical positions on the long-term bond is actually narrower than predicted by rules of thumb based on Sharpe-like ratios. Once the model is augmented to embed real world features such as no price-taking and transaction costs, the scope for tactical position shrinks further. We discuss the model results and its implications in terms of the principal-agent dilemma (government vs. debt manager); the paper also explores the financial stability implications arising from public debt issuance choices. All in all, our findings provide a rationale for the degree of caution often shown by many public debt managers in fulfilling their mandate.

Keywords: public debt management, government bond market, issuance maturity, agency problems, financial stability

JEL Classification: G1, H6, D4