Central banks see Dutch impact on long bonds

NETHERLANDS – The Bank for International Settlements has said that changes to the Dutch pension system has increased the demand for long-dated assets.

“Pension reform in the Netherlands increased the demand for long-dated assets,” the BIS, the central banks’ bank, said in its latest Quarterly Review.

It said many market participants have cited structural factors underlying declining yields for long-maturity bonds. It said US proposals to strengthen defined benefit pension plans by pricing assets and liabilities more accurately and minimising funding shortfalls “reportedly prompted some pension funds to purchase long-dated assets”.

And it said: “Structural factors appeared to have even more importance in the euro area. Some major bond indices in the euro area markets extended duration for technical reasons, pressuring some investors benchmarking themselves against those indices to raise the duration of their investments.”

The BIS said that long-term yields in the major markets remained “surprisingly low” into the new year. “Low yields continued to support investors’ appetite for higher-yielding instruments.”

The Netherlands’ new Financial Assessment Framework for pension funds, the FTK, has been seen as a reason for schemes shifting into longer-dated issues. Under the FTK funds will have to mark their liabilities to market.

But some market participants have expressed scepticism about this idea and have warned that the impact of the FTK has become “over-hyped”.

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