The Interest Rate Effects of Government Debt Maturity: Solving the Bond Conundrum

ABSTRACT Using an empirical model, this paper finds that shortening the average maturity of US Treasury debt held outside the Federal Reserve by 1 year reduces the 5‐year forward 10‐year yield by between 130 and 150 basis points. Based on a pre‐crisis period, these estimates suggest portfolio balance effects are unlikely to reflect only post‐crisis market conditions. These findings also offer a partial explanation for the Greenspan conundrum: the fact that long‐term interest rates in the mid‐2000s rose less than expected after a rise in the Fed funds rate may have been due, to some extent, to the concomitant shortening of government debt maturity.