Lesson 2 of 5 · 13 min
Sovereign instruments and the maturity mix
Sovereigns issue bills, notes and bonds, and although a frictionless world would make maturity irrelevant, rollover risk and the market's need for a liquid risk-free curve lead governments to spread debt across maturities and issue it on a regular schedule.
In short
- Treasury bills: 1 to 12 months, usually zero-coupon, sold at a discount to par. Notes and bonds: medium and long term, mostly fixed-rate in the domestic currency, but also floating-rate, inflation-linked and foreign-currency issues.
- Some instruments are guaranteed but not issued by the sovereign, such as qualifying mortgage-backed securities, and behave as sovereign debt.
- Under Ricardian equivalence, debt maturity is irrelevant to the present value of future taxes. Its assumptions (perfect markets, rational, consumption-smoothing, altruistic taxpayers) do not hold in practice.
- Short-term bills carry a liquidity premium (yields below what they would otherwise be) and let the Treasury flex auction sizes, but heavy reliance on them creates rollover risk.
- Long-term issuance supports a risk-free benchmark curve, interest rate hedging, collateral for repos and derivatives, and central bank operations and FX reserves.
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