The Impact of Pensions and Insurance on Global Yield Curves

by Robin Greenwood and Annette Vissing-Jorgensen

Overview — The global financial crisis and its aftermath had a dramatic impact on the solvency of pension funds and insurance companies. Drawing on a large cross-section of countries, this paper shows the importance of pension and insurance companies in determining the yields on long maturity bonds around the world.

Author 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. We describe settings in which pension discount rules can have a destabilizing impact on bond markets.

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