When Public Debt Goes Long, Corporate Investment Can Go Short

Two U.S. stories converged in February 2026. First, the Congressional Budget Office (CBO) projected large, persistent deficits and a rising federal debt path over the next decade. Second, reporting around the “Warsh trade” revived debate over whether the Federal Reserve should push for a much smaller balance sheet. Both stories focus attention on the same object: how much government debt private investors must absorb, and at what price. Antoine Hubert de Fraisse’s research suggests that another related question matters too: how long that debt is. The finance academic shows that when the supply of long-term government debt increases relative to the supply of short-term debt in a persistent way, long-term discount rates rise relative to short-term ones, and corporate investment shifts away from projects whose payoffs lie far in the future. The NBER post-doctoral fellow and incoming assistant professor of finance at LSE shares his research conclusions with us.

Long-term or short-term?

Dare Media Hub: Your job market paper studies whether the maturity of government debt issuance affects the real economy. What is the central question you are trying to answer?

Antoine Hubert de Fraisse: The paper asks a simple question: if the government borrows the same total amount, does it matter whether it finances itself with long-term debt or short-term debt? This matters because the policy debate usually focuses on the size of public borrowing. But governments also choose its maturity structure. They can issue long-term bonds and lock in financing for many years, or they can issue short-term debt and refinance it more frequently. The total amount borrowed may be identical, but the consequences for financial markets are not.

My main finding is that this choice matters. When the supply of long-term government debt rises relative to short-term debt in a persistent way, long-term interest rates increase relative to short-term rates, and corporate investment shifts away from projects whose payoffs arrive far in the future. Quantitatively, I estimate that a one-year increase in the average maturity of government debt raises the 10-year yield by about 30 basis points relative to the 1-year yield. That is associated with a reallocation of roughly 4.5% of total corporate investment away from long-term projects and toward shorter-term ones.

Investors need extra compensation for long-term debt

Dare Media Hub: What is the economic mechanism behind that result?

Antoine: The key idea is that long-term and short-term government debt are not perfect substitutes for investors. A long-term bond locks in nominal payments far into the future. That exposes investors to interest-rate risk: if rates rise, the market value of those fixed payments falls. Short-term debt is much less exposed to that risk because it matures quickly and can be rolled over at the new rates.

Because of this difference, investors require additional compensation to hold more long-term debt. So, when the government issues more long-term debt relative to short-term debt, long-term yields rise relative to short-term yields.

That matters for firms because long-term interest rates affect the hurdle rate for long-horizon investment. If investors can earn a higher return on long-term government bonds, they will demand a higher return from private projects whose payoffs lie far in the future. As a result, firms become relatively less willing to undertake long-duration investments and instead shift toward projects that pay off sooner.

Dare Media Hub: What do you mean by long-term versus short-term investment in practice?

Antoine: The distinction is about when the payoffs are expected to arrive. Long-term investment includes projects such as infrastructure, real estate development, heavy machinery, and research and development. These are activities where returns are spread over many years, so they are especially sensitive to long-term discount rates. Shorter-term investment includes things like working capital, short-lived equipment, or projects that generate returns more quickly. Those are less sensitive to changes in long-term rates.

So, when long-term public borrowing increases, the effect is not necessarily “less investment” across the board. It is a change in composition: investment shifts away from long-horizon projects and toward shorter-horizon uses of capital.

Shocks to the maturity structure 

Dare Media Hub: How do you show that this is causal, rather than just a reflection of the business cycle?

Antoine: That is the central empirical challenge. Governments may change the maturity of their borrowing in response to economic conditions that also affect firms’ investment decisions. If that were the whole story, it would be difficult to separate cause from correlation.

To address this, I exploit a small number of large shocks to the maturity structure of U.S. Treasury issuance between 1965 and 2007. These shocks were triggered by political decisions and institutional constraints. Crucially, once they occurred, they persisted for long periods because of institutional constraints on how Treasury issuance could subsequently adjust, rather than contemporaneous macroeconomic conditions. Because these issuance changes were highly persistent, they gradually reshaped the maturity of the outstanding stock of government debt as maturing securities were replaced with newly issued debt under the new maturity mix.

Persistence is also crucial because short-lived fluctuations would not materially change the long-term risk investors face and, therefore, would not be expected to have large effects on long-term rates or firms’ investment planning. This gives me plausibly exogenous variation in government debt maturity that allows me to trace its effect on long-term rates and on the composition of corporate investment.

Policymakers should think about how the government borrows

Dare Media Hub: What is the main policy implication?

Antoine: The main implication is that public debt maturity management is not neutral for real outcomes. Choices about the maturity of government borrowing can shape the composition of private investment even when total borrowing does not change. Policies that increase the net supply of long-term government bonds tend to raise long-term rates and discourage long-horizon corporate investment. Policies that reduce that supply can have the opposite effect.

This is relevant not only for Treasury debt management, but also for central bank balance-sheet policy. When a central bank buys or sells long-term government bonds, it changes the amount of long-term debt that private investors must hold. My findings suggest that these decisions can affect not just financial conditions in general, but the kinds of private investments firms choose to undertake.

The broader lesson is that policymakers should think not only about how much the government borrows, but also about how it borrows. When long-term corporate investment is important for productivity growth and long-run economic performance, the maturity of public debt can have meaningful welfare effects.

Antoine Hubert de Fraisse is a Post-Doctoral Fellow at the National Bureau of Economic Research under the Long-Term Fiscal Policy Program supported by the Peter G. Peterson Foundation. He will join the Department of Finance at the London School of Economics as Assistant Professor in September 2026. 

Daniel Brown is Head of Research Communication at HEC Paris.