The Impact of Pensions and Insurance on Global Yield Curves

Robin  Greenwood; Annette   Vissing-Jorgensen

Working Paper | HBS Working Paper Series | 2018

The Impact of Pensions and Insurance on Global Yield Curves

by Robin Greenwood and Annette Vissing-Jorgensen

Abstract

We document a strong effect of pension and insurance company (P&I) assets on the long end of the yield curve. Using data from 26 countries, the yield spread between 30-year and 10-year government bond yields is negatively related to the ratio of pension assets (in funded and private pension and life insurance arrangements) to GDP, suggesting that preferred-habitat demand by the P&I sector for long-dated assets drives the long end of the yield curve. We draw on changes in regulations in several European countries between 2008 and 2013 to provide well-identified evidence on the effect of the P&I sector on yields and to show that P&I demand is in part driven by hedging linked to the regulatory discount curve. When regulators reduce the dependence of the regulatory discount curve on a particular security, P&I demand for the security falls and its yield increases. These effects extend beyond long government bonds. Our results suggest that pension discount rules can have a destabilizing impact on bond markets that reverses once rules are changed.

Keywords: pension funds; Investment Funds; Insurance; Assets; Interest Rates; Bonds;

Language: English

Format: Print

54 pages

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Citation:

Greenwood, Robin, and Annette Vissing-Jorgensen. "The Impact of Pensions and Insurance on Global Yield Curves." Harvard Business School Working Paper, No. 18-109, June 2018. (Revised December 2018.)

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The Impact of Pensions and Insurance on Global Yield Curves

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