Long-term Investors, Demand Shifts, and Yields
80 Pages Posted: 11 Aug 2021 Last revised: 24 Nov 2021
Date Written: August 8, 2021
I use detailed data on bond and derivative positions of pension funds and insurance companies (P&Is) in the Netherlands to study demand shifts and their causal effect on yields. In particular, I exploit a reform in the regulatory discount curve that makes liabilities more sensitive to changes in the 20-year interest rate but less so to longer maturity rates. Following the reform, P&Is reduced their longest maturity holdings but increased those with maturities close to 20 years. The aggregate demand shift caused a steepening of the long-end of the yield curve with a decrease in the 20-year yield of 10 basis points and an increase in the 30-year yield of 20 basis points. Similar effects on yields appear in a large panel of European countries after EU insurance regulation implemented the same reform. My findings have important policy implications, as they indicate that the regulatory framework of long-term investors directly affects the governments’ cost of borrowing.
Keywords: long-term investors, demand shifts, regulatory constraints, yield curve
JEL Classification: G12, G18, G22, G23, G28
Suggested Citation: Suggested Citation