The Hunt for Duration: Not Waving But Drowning?

Long-term interest rates in Europe fell sharply in 2014 to historically low levels. This development is often attributed to yield-chasing in anticipation of quantitative easing (QE) by the European Central Bank (ECB). We examine how portfolio adjustments by long-term investors aimed at containing duration mismatches may have acted as an amplification mechanism in this process. Declining long-term interest rates tend to widen the negative duration gap between the assets and liabilities of insurers and pension funds, and any attempted rebalancing by increasing asset duration results in further downward pressure on interest rates. Evidence from the German insurance sector is consistent with such an amplification mechanism.

Keywords: long-term yield compression, insurance sector, liability-driven investment, duration mismatch

JEL Classification: E43, G11, G12, G22

Suggested Citation: Suggested Citation

Domanski, Dietrich and Shin, Hyun Song and Sushko, Vladyslav, The Hunt for Duration: Not Waving But Drowning? (October 2015). BIS Working Paper No. 519, Available at SSRN: https://ssrn.com/abstract=2671911