Maturity Mix:

Maturity mix has an important bearing on management of public debt.  It was well established that the public debt should be well funded. It implied public debt should have bonds/securities with long-term maturities.  For example, the British debt during the 19^th century was mostly in the form of consols or perpetual securities as stated earlier. As there is no fixed maturity date for these consols, they can be retired at the government option if it is willing to pay the  market price. This protects the government from the creditors who demand payment of money at an inopportune time. But the views of the government to-day are totally different.  The most important assumption of public debt management is that maturing issues are all refunded. The size of national debt may increase or decrease depending upon the government's stabilization policy.  Moreover, if some issues mature, they will be refunded in terms of other issues.  It may also be noted that if the average debt outstanding is shorter, the larger will be the size of refunding operations, though it does not influence the maturity structure.  So the important underlying guideline for the choice of the maturity mix or structure is to choose a term structure so as to minimize the interest cost. As the cost of borrowing differs with the maturity of the debt, those bonds need to be chosen which the investors would be willing to absorb at the lowest cost. In other words, the government should borrow from the lowest-cost lender.

Another issue to be considered while choosing the maturity mix is the inflation. It is a well established fact that long term securities are less inflationary as they reduce the problem of frequent and continuous refunding. It has been held that government can reduce the annual rate of inflation just by lengthening the average maturity of debt.  The maturity needs to be linked to indexation of public debt. Debt indexation always suggests long term maturities.  This is mainly because debt indexation neutralizes effects of inflation on debt. In the absence of indexation, shorter maturities are better as longer maturities tend to exacerbate expectations of high inflation.