Why do governments use refunding?

Governments use refunding primarily to pay off existing debt at more favorable interest rates. When market conditions change, and interest rates decline, governments can refinance their existing debt by issuing new securities at the lower rates. This process allows them to reduce their interest payments over the life of the bonds, leading to cost savings and improved cash flow management.

Refunding not only helps in taking advantage of better rates but also allows governments to improve their overall debt structure, potentially shortening the maturity schedule or changing the characteristics of the original bonds to better fit their current financial situation. This strategy can be essential in maintaining fiscal health and ensuring that a government's obligations remain manageable in the long term.