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Long-term Investors, Demand Shifts, and Yields

Working paper 769
Working Papers

Gepubliceerd: 07 maart 2023

Door: Kristy Jansen

I use detailed data on bond and swap positions of pension funds and insurance companies (P&Is) in the Netherlands to study demand shifts and their causal effect on government bond 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 substantial steepening of the long-end of the yield curve. Using the regulatory reform as an exogenous shock to estimate the demand elasticities of various investors in the government bond market, I show that the banking sector is most price elastic and primarily responsible for absorbing demand shocks. My findings indicate that the regulatory framework of long-term investors spills over to other sectors and directly affects the governments’ cost of borrowing.

Keywords: demand shifts; insurance companies; pension funds; price elasticity of demand; regulatory constraints; yield curve
JEL codes G12; G18; G22; G23; G28

Working paper no. 769

769 - Long-term Investors, Demand Shifts, and Yields

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Research highlights:                                                             

  • This paper studies the causal effect of demand shocks by pension funds and insurance companies (P&Is) on government bond yields using detailed data on bond and swap positions.
  • For identification, I  exploit a reform in the regulatory discount that made 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, with stronger effects for those closer to their solvency constraint.
  • The aggregate demand shift caused a substantial steepening of the long-end of the yield curve and banks were primarily responsible for absorbing the demand shock caused by the P&I sector.
  • My findings have important policy implications, as they indicate that the regulatory framework of long-term investors spills over to other sectors and directly affects the governments’ cost of borrowing.

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