Long-Term Investors, Demand Shifts, and Yields.

This article examines the impact of a 2012 Dutch regulatory reform that altered the discount curve used to value the liabilities of pension funds and insurance companies (P&Is), making these liabilities more sensitive to 20-year interest rates but less sensitive to longer maturities. Exploiting this reform as an exogenous shock, the study finds that affected P&Is reduced holdings of bonds with maturities over 30 years while increasing holdings around 20 years, leading to a steepening of the long end of the Dutch yield curve. Using detailed holdings and derivative data, the research identifies banks as the most price-elastic investors who absorb these demand shocks, likely due to their role as counterparties in interest rate swaps with P&Is. Extending the analysis to other euro area countries, the study shows similar but smaller yield curve effects linked to the size of national insurance sectors, highlighting the regulatory reform's broader influence on long-term bond markets and the interconnectedness between regulatory frameworks, investor behavior, and government borrowing costs.