The impact of pension funds on global yield curves
Greenwood and Vissing-Jorgensen used data from 26 countries to show:
The yield spread between 30-year and 10-year government bond yields is negatively related to the ratio of pension and insurance assets to GDP;
Demand by the pension and insurance sector for long-dated assets drives the long end of the yield curve;
The pension and insurance sector’s demand is in part driven by the statutory discount curve used for regulatory purposes. In particular, pension and insurance companies can hedge future statutory underfunding by buying assets with returns tied to the rate used to discount their liabilities;
Regulatory changes of the reference curve by which pensions discount their liabilities, results in changes in hedging demand, and changes in the prices of fixed income assets.
The Impact of Pensions and Insurance on Global Yield Curves
Authors: Robin Greenwood, Annette Vissing-Jorgensen
From: Harvard University, University of California Berkeley
The negative 30-year swap spread
The 30-year U.S. swap spreads have been negative since September 2008. Klingler and Sundaresan argue that this is due to:
- Under-funded pension plans which prefer to meet the duration needs, arising from their unfunded pension liabilities, through receiving fixed payments in 30-year interest rate swaps, instead of using levered positions in bonds;
- Swap dealers, who face balance-sheet constraints and require a compensation in the form of negative swap spreads to meet this demand
Empirical evidence suggests that the link between pension funds’ underfunding and swap spreads exists in the US, Japan and Netherlands.
An explanation of negative swap spreads: demand for duration from underfunded pension plans
Authors: Sven Klingler and Suresh Sundaresan
From: BIS
