Dutch Pension Fund Watch – A higher equilibrium in rates, time to start receiving?

by: Fouad Mehadi

  • We briefly discuss whether pension funds have been triggered to adjust their hedge ratios
  • Following Draghi’s remarks in Sintra two weeks ago, we judge that the market has found a stronger foothold at higher interest rates
  • The trigger level for our Old pension funds has been breached, long end receiving activity should start soon if it hasn’t started already
  • For our Old pension fund we judge that the 1.50% trigger level in 20y will lead to a gradual increase in the hedge ratio by 10%
  • Our model estimates that receiving activity will be relatively evenly dispersed across the curve with the majority of the receiving to be concentrated in the 15y, 20y and 30y maturity
    buckets which should result in significant steepening pressure in 30s50s
  • 10s30s in EUR swaps has remained relatively stable in the sell-off, 5y5yfwd vs 10y looks cheap and we judge that 10y should richen from these levels…
  • …but receiving activity in the 30y area is pushing down rates in the long end. We prefer to remain neutral in 10s30s
  • Regardless of the expected steepening pressure in 30s50s the spread has remained stable
  • We judge that in a rise of rates and increased volatility, the value of having exposure to convexity increases, which temporarily keeps a lid on further steepening
  • Though we expect 30s50s to steepen in the longer term
  • We still prefer a Buxl ASW tightener in a higher interest rate environment

 

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