In Search of Habitat

Abstract

We perform portfolio-level analysis to understand insurance firms' preferred-habitat behavior in the government bond market. Based on portfolio durations and portfolio weights across maturities, we find that individual insurers' interest rate risk exposures and portfolio elasticities are related to characteristics of operating liabilities and corporate financing constraints. We show that such habitat behavior has a significant impact on bond pricing -- during the "quantitative easing" era, the bond purchases by the Federal Reserve have a larger impact on the yields of Treasury bonds with a higher habitat demand.

Keywords: Preferred habitat; bond yield; quantitative easing