NORWAY – Pension funds’ demand for long-term bonds may be “price inelastic”, says the Norwegian central bank.

“Pension funds have also been purchasing long-term government bonds. This activity reflects these investors’ need to reduce the interest rate risk that arises when companies’ liabilities and assets have very different maturities,” Norges Bank said in its latest inflation report.

“Prospects of regulatory changes with regard to pension funds have also increased the need for companies to invest in long-term bonds.

“With such portfolio adjustments, demand may be relatively price inelastic. In conjunction with a limited supply of government bonds, this may have contributed to keeping long-term interest rates low.”

Norges is the latest bank to note the effect of pension demand on the bond market and interest rates, following similar remarks last month by the Bank of England.

Meanwhile, Standard & Poor’s has pointed out that the renaming of Norway’s Petroleum Fund “has not explicitly linked fund capital to government pension obligations”.

It said the new Government Pension Fund – Global’s capital can still be appropriated for other government spending needs – “resulting in continued pressure to spend the abundant oil revenues rather than put them aside for future spending needs”.

“The new government has yet to come forward with any other concrete measures,” S&P noted.

An earlier report on Norway by Moody’s said: "Even though the fund is increasing faster than anticipated because of high oil prices, no one is suggesting that it could ever fully cover the extra expenses posed by the demographic transition.”