Dutch Pension Fund Watch – Trigger Points and Long End Curve Dynamics

by: Fouad Mehadi

  • With combined assets under management of more than EUR 1.2 trillion, the Dutch pension fund sector is a large player in the EUR swap market
    Understanding the behaviour of these funds is necessary to formulate a view on the long end of the EUR swaps curve. In this inaugural publication, we start by discussing the main principles and characteristics of the Dutch pension fund sector. For our analysis we have classified the Dutch pension fund sector into three categories, namely old, average and young based on the duration of their liabilities.
  • Trigger levels in EUR swap rates determine the hedge ratios
    We will also take a closer look at the trigger levels in the 20y and 30y swap rates in relation to possible changes in their hedge ratio. We then present our models to simulate the hedging behaviour of each of these three pension fund types under three scenarios taking into account the interest rate trigger points. The scenarios include our base case scenario of curve steepening; a market environment characterised by heightened political risk in the eurozone and a return to a pre-ECB QE scenario.
  • Dutch pension funds will leave their mark in the long end in the EUR swap market
    Pay 30s50s in our base case and heightened political risk scenario. Receive 15y5yfwd or receive 15y5yfwd vs 5y5yfwd in a flare up of eurozone political uncertainty. Moving towards a pre-ECB QE environment, we recommend paying 10s30s and/or a Buxl ASW tightener or in a box vs Bund ASW.
  • Expected flows could represent a significant part of the weekly volumes traded
    Finally, we find that our estimated flows in the base case and heightened political risk scenarios, would represent more than 17% and 21% of the total estimated weekly EUR swap volumes in the 30-50y part of the curve. In the pre-ECB QE scenario we find that this would be more than 51%. Dutch-Pension-Fund-Watch-Trigger-Points-and-Long-End-Curve-Dynamics.pdf (844 KB)