Pension funds and the evolving market for (ultra-)long government bonds

Abstract

The demand for long-dated bonds has increased, driven by stricter asset–liability matching regulations governing pension funds, new international accounting standards, as well as new risk-based regulations for insurance companies. Projections of rapidly ageing and longer-living populations in most OECD countries indicate that the demand for ultra-long paper is poised to grow further. Governments in several OECD countries have responded to that demand by starting or re-introducing the issuance of very long (20–30 years) and ultra-long (30 years and longer) bonds, provided that the issuance of those bonds is consistent with the cost-risk objectives of cost minimisation subject to a preferred level of risk. An important consideration for issuers is that pension funds and insurance companies are to some degree buy-and-hold investors. This may lead to illiquid markets in long-dated paper when the ongoing supply of (ultra-)long government bonds remains below a certain critical level, result)