How does the composition of outstanding debt affect federal borrowing costs?
The mix of outstanding Treasury securities can have a significant influence on the federal government's interest payments. Longer-term nominal (i.e. not inflation indexed) securities typically carry higher interest rates primarily due to investor concerns about the uncertainty of future inflation. While this translates to higher borrowing costs for the government, longer-term securities offer the government the certainty of fixed interest payments over their maturity and reduce the amount of debt that Treasury needs to refinance in the short term. In contrast, shorter-term securities generally carry lower interest rates but add uncertainty to the government's longer-term interest costs and also require Treasury to conduct more frequent auctions to refinance them as they mature, which poses rollover riskThe risk that Treasury will have to refinance its debt at less favorable rates..