IMF warns short-term debt could raise government borrowing costs

October 14, 2026 (MLN): Governments in advanced economies, the US in particular, should be careful about relying too heavily on short-term debt, because it passes higher borrowing costs through to them faster when inflation surges, the International Monetary Fund (IMF) said on Wednesday, according to the Wall Street Journal.

Yields on longer-term borrowing have climbed in recent years. The IMF attributed this partly to a steady rise in debt sales and partly to weaker demand from buyers, such as central banks, that prefer longer maturities.

To cut borrowing costs, some governments have shifted toward short-term debt, which typically pays lower interest rates. The Fund warned that, with inflation shocks now frequent, this shift could have the opposite effect to the one intended.

Short-dated debt has to be replaced with new issuance more often. Governments can therefore face higher costs when central banks raise key interest rates to contain price pressures during a supply shock, such as the one caused by the war between the US and Iran.

The Fund said governments in several advanced economies are refinancing more debt at shorter maturities, which lets higher policy rates feed into borrowing costs more quickly. It added that high debt combined with shorter maturities can make restoring price stability harder and costlier for public finances.

Among the Group of Seven (G7) economies, the US has leaned most heavily on short-term Treasury bills to fund its budget deficit. France is considering raising issuance of shorter-term debt as investors grow more reluctant to lend to the heavily indebted country for longer periods.

The European Central Bank has raised its key rate twice since the war began in late February, and investors expect another increase before the end of this year, with further hikes in 2027.

Governments may hope to avoid locking in high long-term rates by selling short-term paper, expecting inflation to be tamed by the time it matures so that new bills can be sold at lower rates.

With inflation shocks more frequent, however, they could end up paying even higher rates, or at least fail to secure the savings they expect. The Fund also noted that central banks may need to hold rates higher for longer, which would worsen debt dynamics.

The IMF said higher interest costs are already making it harder for governments to contain borrowing. It projects US government interest payments will rise to 5.7% of gross domestic product (GDP) in 2031, roughly equal to Social Security spending, from 2.8% of GDP before the Covid-19 pandemic.

Rising interest bills also mean governments must run smaller primary deficits, which exclude debt-servicing costs, to stop debt from growing. Globally, the Fund estimated that a primary deficit of 2.6% of GDP would stabilize debt relative to output, down from 3.3% currently.

The IMF said the global primary deficit is expected to widen in 2026, the opposite of the direction needed to stabilize debt.

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