Reversal of fortune
Inverted swap spreads have defied earlier predictions that they were a short-term aberration to still be a feature 18 months after their first appearance. Is this set to continue and, if so, does it pose an opportunity for pension schemes and insurers? Laurie Carver reports
The precipitous decline in long-term interest rates at the tail end of 2008 caused mayhem for pension schemes and insurers subject to market-consistent regulation of their liabilities. As they attempted to hedge their long-dated liabilities, it simply forced the discount rate lower, thereby increasing the size of their liabilities.
This “ALM death spiral”, as one Swedish insurance risk manager called it (see Life & Pension Risk, February 2009), received much attention but the importance of swap
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