Default and the Maturity Structure in Sovereign Bonds

We build a dynamic model of international borrowing and default that can rationalize the dynamics of spread and the maturity composition of debt in the data. The spread curve reflects the dynamics of the endogenous probability of default that is persistent yet mean reverting because of the dynamics of debt and output. Long term debt is beneficial because it can hedge against variations in short rates that are negatively related to consumption. The maturity composition of debt reflects the time variation in the hedging properties of long term debt and respond to a time varying supply of credit that endogenously becomes stringent when default probabilities are high, especially for long debt. When calibrated to data from Brazil, the model matches quantitatively the dynamics of the spread curve and the volatility and maturity composition of new debt issuances.