The article “Useful Practices in Public Debt Management” raises an important issue – the quality of Kazakhstan’s public debt management. Its central premise is difficult to dispute. The Ministry of Finance needs to develop the secondary market for government securities, improve the liquidity of its bond issues, smooth the maturity profile and use a broader range of debt management instruments.
However, many of the article’s conclusions rest on a flawed understanding of how bonds, buybacks and the yield curve work. As a result, a fundamentally valid topic leads the author to conclusions that either require far more rigorous justification or directly contradict basic financial logic.
This is no longer simply a matter of differing views on debt policy. One can debate how long the government should borrow for and how actively it should use buybacks. But a bond’s market price, face value and refinancing cost are not matters of opinion. They are basic financial concepts.
Mistake No. 1. A bond priced at 55 does not mean a saving of 45
The article’s central problem appears almost immediately. Andrey Chebotarev cites the example of US government bonds that may trade well below face value. In simplified terms, the government can buy back $100 of debt for $55. The conclusion is that the government spends $55 to eliminate an obligation to pay $100 in the future, effectively saving the difference. At first glance, the logic seems straightforward:
Ø debt – $100;
Ø buyback price – $55;
Ø saving – $45.
But that is not how the bond market works. A bond’s face value is the amount the issuer must pay its holder at maturity. Its market price reflects what the full stream of future payments attached to that bond is worth today.
Suppose the government issued a bond several years ago with a face value of $100 and an annual coupon of 5%. Market interest rates later rose to 10-15%. Investors would no longer have any reason to buy the old bond for $100 when newly issued bonds offer substantially higher returns. The price of the older bond therefore falls.
In other words, the bond trades at $55 not because the market is somehow willing to forgive the government the remaining $45. It is worth $55 because its low future coupon payments and the repayment of principal several years from now have a present value of roughly that amount when discounted at today’s higher interest rate.
A simple everyday example helps illustrate the point.
Imagine an apartment that you will not receive for another ten years. No one today is obliged to pay its full future value merely for the right to take possession of it a decade from now. Money received today can be used and invested throughout those ten years. A future asset and its value today are therefore two different things.
Put even more simply, imagine it is 2015 and you are offered an apartment at 2025 prices. You would naturally refuse.
The same principle applies to bonds. The difference between a bond’s face value and its market price is not, in itself, income or a saving for the government.
Mistake No. 2. A buyback often does not eliminate debt – it replaces it with new debt
There is a second fundamental issue without which the benefits of a buyback cannot be assessed. The government must find the money to purchase its own bond for the same hypothetical $55. If the money comes from surplus budget funds, that is one situation. But if the government issues new debt to finance the buyback, the old obligation is effectively replaced by a new one.
Consider an ordinary borrower.
A person has KZT 5 million remaining on an old loan carrying an annual interest rate of 10%. They take out a new KZT 5 million loan at 15% and use it to repay the old loan in full. Technically, the old loan no longer exists. But has that person become KZT 5 million richer?
Obviously not. They have simply replaced one debt with another – and a more expensive one at that.
The same logic applies to the government. If it borrows at today’s high market rate and uses the proceeds to buy back older bonds with low coupons, the cost of the new debt must be taken into account.
This is precisely why the US Treasury treats buybacks primarily as a tool for managing the market and the structure of its debt. Repurchased securities may be replaced by new issuance, so the transaction itself does not mechanically reduce the economic value of government debt.
Buybacks can indeed be useful. They can remove old, illiquid issues from the market, concentrate trading in larger bonds, smooth future maturity peaks or improve cash management.
But that is an entirely different economic effect. The formula “the debt was bought back at 85% of face value, therefore the government saved 15%” is not an appropriate way to measure it.
The same problem arises when Andrey Chebotarev turns to Kazakhstan. He cites a government bond with a 7.22% coupon that trades at roughly 85% of face value. The author presents the 15% discount as a potential saving for the government. Yet the bond’s low price is explained precisely by the fact that its coupon is well below current market rates. With market yields at around 15%, a bond paying a 7.22% coupon should trade below face value. The market has already priced in the difference in the cost of money.
Mistake No. 3. A yield curve cannot be assembled from rates observed at different times
Another significant problem concerns the analysis of the yield curve. The author concludes that Kazakhstan’s curve effectively lacks a normal slope. Yet the evidence combines interest rates and yields observed on different dates: the short-term cost of money comes from one period, the yield on a medium-term bond from another and the longer-term yield from yet another. That is not how a yield curve is constructed.
A yield curve is a snapshot of the market on a specific day. If one-year debt yields 16% today, five-year debt 14.5% and ten-year debt 14%, one can say that yields decline as maturities lengthen and then analyse why the curve has taken that shape.
But one cannot take today’s one-year rate, a five-year rate from August and a ten-year rate from December last year and connect them into a single line.
That would be like comparing the temperature in Almaty this morning, at midday a week from now and in the evening a month later, and then using those three readings to chart the temperature over a single day.
Over several months, inflation, the base rate, market expectations, liquidity and demand from banks, the Unified Accumulative Pension Fund and foreign investors all change. Values observed at different times therefore describe different market conditions.
The article also conflates two separate concepts: the time value of money and the yield curve.
The time value of money means that KZT 100 today and KZT 100 several years from now are not economically equivalent. Money available today can be deposited or invested to earn a return. But this does not mean that long-term interest rates must always be higher than short-term rates.
The base rate may, for example, be very high today because of inflation. If the market expects inflation to slow and the National Bank to cut rates in the coming years, the yield on a ten-year bond may well be lower than the yield on a one-year bond.
This does not violate financial theory. On the contrary, expectations about future interest rates are among the main forces shaping the yield curve.
Mistake No. 4. Borrowing short and waiting for rates to fall is not a free saving – it creates additional risk
Andrey Chebotarev proposes that Kazakhstan make greater use of short-term bonds and floating-rate instruments while interest rates are high, postponing long-term issuance until rates have fallen. Under a favourable scenario, this strategy could indeed save money. If the government borrows for one or two years today and interest rates subsequently fall substantially, it will be able to refinance that debt more cheaply. But the key word here is “if.”
No one knows the precise path that inflation and the base rate will take over the next several years. If inflation proves more persistent than expected or another external shock occurs, as happened with the war in Ukraine or tensions around the Strait of Hormuz, short-term debt will have to be refinanced at another high rate, possibly an even higher one. This is known as refinancing risk.
The everyday analogy is straightforward. Consider two mortgages. The first has a fixed rate of 12% for ten years. The second is repriced annually.
If the market rate falls to 8% after a year, the second borrower benefits. But if it rises to 18%, that borrower faces substantially higher costs, while the first continues paying the original 12%. A fixed long-term rate is therefore not merely expensive debt. It is also the price paid for certainty.
This is why international public debt management practice does not seek to minimise interest rates at any cost. It aims to achieve the best balance between cost and risk.
A government must simultaneously consider debt-servicing costs, average maturity, future redemption volumes, interest-rate risk and the market’s capacity to refinance its obligations. A proposal to shift heavily into short-term debt merely because rates are expected to fall amounts to placing a large bet with public finances on the accuracy of a macroeconomic forecast.
This is not an obvious best practice. It is one possible strategy, and one that carries substantial risks.
It is worth recalling that as recently as 2024, the National Bank had set out on a clear path towards lower interest rates. Yet rising uncertainty over the exchange rate and inflation forced the regulator to raise rates instead. No one in the market expected the base rate to increase at the time, just as no one anticipated the subsequent decision to raise it to 18%. Under the author’s proposed logic, the country could have ended up on the losing side at least twice in the past few years alone.
Mistake No. 5. The KZT 1.5 trillion saving must be calculated, not merely asserted
The final quantitative estimate raises the most serious questions. The author claims that more effective debt management could save Kazakhstan KZT 100-150 billion a year, with the total benefit potentially reaching KZT 1.5 trillion. The problem is not that such savings are inherently impossible. It is that no calculation is provided that would allow the claim to be verified. To arrive at such an estimate, one would need to know:
Ø which specific bonds the government would buy back;
Ø the volume of those bonds;
Ø the price at which they would be purchased;
Ø where the money for the buyback would come from;
Ø what new debt would be issued to replace them;
Ø at what rate and for what maturity;
Ø what the payment profile would have been without the change in strategy;
Ø what future path of interest rates is assumed.
Only then can the two scenarios be compared and the economic effect calculated. If a family claims that refinancing its mortgage will save it KZT 10 million, the figure can be checked by asking for the old rate, the new rate, the outstanding principal, the loan term and any fees. Without those details, the KZT 10 million figure proves nothing on its own. The same applies to public finances.
Until the methodology is presented, KZT 1.5 trillion is not a reproducible economic calculation. It is the author’s estimate. That is not enough to justify changing the government’s public debt management strategy.
The right question has been asked, but the answer requires a different financial logic
The underlying idea of improving the quality of Kazakhstan’s public debt management deserves support. The country does indeed need a liquid secondary market for government bonds, large benchmark issues, a predictable borrowing calendar, a smoother maturity profile and active management of its debt structure. Buyback operations can also play a role.
But their effectiveness should be assessed against the full cost and risk profile of the debt portfolio, not by looking at the difference between a bond’s face value and its market price. This is the central problem with Andrey Chebotarev’s article.
The author raises the right question, but several of his key conclusions are based on an insufficiently accurate interpretation of the basic principles of the bond market.
A bond trading below face value is not a gift to the government. A buyback financed with new borrowing does not generate automatic savings. A yield curve cannot be constructed using data from different periods. Short-term debt lowers potential costs only at the price of higher refinancing risk. And a claimed saving of KZT 1.5 trillion requires a complete and reproducible calculation.
This is not about differing views on economic policy. It is about financial mechanics. Before advising the government on how to manage its debt more effectively, one must first understand precisely what it is saving, where those savings come from and what additional risk it accepts in return.
Toqtasyn Baqbergen, National Bureau of Economic Research, exclusively for EconomyKZ.org
