Governments in advanced economies such as the U.S. should be wary of relying too heavily on short-term debt, since it exposes them more immediately to higher borrowing costs when inflation surges, the International Monetary Fund said Wednesday.
Yields on longer-term borrowing have risen over recent years, partly a reflection of a steady increase in debt sales and partly the consequence of a decline in demand from buyers such as central banks that favor extended maturities. In an effort to lower borrowing costs, some governments have switched to selling more short-term debt, which typically pays lower interest rates. Governments may hope to avoid locking in to higher long-term interest rates by selling short-term debt instruments in the expectation that inflation will have been tamed by the time they mature, and new bills can be sold at a lower interest rate.
In the case of France, the European Central Bank has already raised its key interest rate twice since the war started in late February, and investors expect to see another move higher before the end of this year, and further moves in 2027. At a global level, the Fund estimated that a primary deficit of 2.6% of GDP would stabilize debt relative to economic output, down from 3.3% now.
The Fund said that a heavy reliance on short-term bills makes it more expensive for the government if the central bank raises its key interest rate in response to an inflation surge, which have become more frequent as conflicts between nations have proliferated. “High debt and shorter maturities can therefore make restoring price stability more difficult and more costly for the public finances,” the IMF warned.
