DEBT MATURITY-YIELD RELATIONSHIP IN TURKEY: AN EMPIRICAL ASSESSMENT

Hakan BERUMENT (Bilkent University)
Eray M. YÜCEL (Bilkent University)

Literature on debt management suggests that issuing long-dated securities insulates budget from interest rate shocks [Barro:1995], and minimizes risk and interest cost [Missale:1992, Missale and Blanchard:1994]. This study empirically investigates the debt maturity-yield relationship for Turkish economy which can be characterized by chronic-high inflation, high debt-to-GDP ratio, frequent experience of crises and currency devaluation, financial repression, and low credibility of policy-makers. Contrary with the earlier literature, a reciprocal linkage between debt maturities and yields, so called a downward sloping yield curve, is revealed, using treasury auction data for the period 1985-2001. It is argued that low credibility of policy-makers allows only for shorter maturities, given the reluctance of creditors to extend funds for long-term financing of public deficits. However, the chronic inflation and fear of crisis pull the yields on treasury bills far above the generally prescribed levels. Such management of debt is expected to be self-promoting and further unsustainability of debt may be unavoidable.