3 Jul 2013
Flash: Can rising yields reverse drag on solvency? – Goldman Sachs
FXstreet.com (New York) - Over recent years pension funds and insurance companies suffered from falling bond yields, notes the Economics Research Team at Goldman Sachs.
According to the team, “Going forward increases in bond yields are likely to improve the solvency (i.e. level of funding) as their liabilities (which usually have a longer duration than their assets) are discounted more.”
Better solvency reduces the risk of further cash contributions and might allow pension funds and insurance companies to take more risk, potentially even in equities. Since the tech bubble they have significantly de-risked in equities, in part driven by regulation but also due to funding risks from falling bond yields. While a large rotation back into equities appears unlikely we would at least expect equity selling to slow or even end.
According to the team, “Going forward increases in bond yields are likely to improve the solvency (i.e. level of funding) as their liabilities (which usually have a longer duration than their assets) are discounted more.”
Better solvency reduces the risk of further cash contributions and might allow pension funds and insurance companies to take more risk, potentially even in equities. Since the tech bubble they have significantly de-risked in equities, in part driven by regulation but also due to funding risks from falling bond yields. While a large rotation back into equities appears unlikely we would at least expect equity selling to slow or even end.