Extending debt maturity structure is harder than you think

Editor's Note: Sergio Schmukler is a Lead Economist in the World Bank's Development Research Group

Emerging economies have tried to promote long-term debt because it reduces maturity mismatches and the probability of crises. A new World Bank paperby Luis Opazo, Claudio Raddatz and Sergio Schmukler provides new evidence from Chile on domestic demand for long-term instruments.

Using data from monthly asset-level portfolios of Chilean institutional investors (mutual funds, pension funds, and insurance companies) to compare their maturity structure to that of U.S. bond mutual funds, the authors find that Chilean asset-management institutions (mutual and pension funds) hold large amounts of short-term assets relative to U.S. mutual funds and Chilean insurance companies.

This “Short-termism” is not driven by lack of instrument availability or tactical behavior. Rather, it seems to be explained by the desire to minimize inflation risk and, more importantly, by manager incentives that tilt demand toward short-term instruments.

The authors conclude that extending the maturity of emerging market debt may require reducing risk and reshaping investor incentives.