Debt Market Responses to Longevity Shocks

Abstract

Unexpected increases in life expectancy induce life insurers to extend the duration of their assets, which results in significant purchases of long-term corporate bonds. We show that this variation in life insurer demand for bonds of specific maturities has real-economy consequences for corporate sector financing and investment policies. As longevity increases, long-term bond yields fall and the corporate sector absorbs such shocks by issuing more long-term bonds, while simultaneously increasing investments in long-term assets. The effects are particularly marked where life insurers are the primary holders of a firm’s debt. The response is also more pronounced for firms that rely on long-term financing, and financially unconstrained firms.

Keywords: debt maturity, longevity risk, life insurers, bond yields, duration

JEL Classification: G12, G22, G32, J11