EUROPE - European pension reform could "substantially" flatten the euro yield curve, a new report said.
The study by ABN AMRO entitled ‘ Rates, pension regulation & reform’ said that the new Dutch pension fund solvency regulations and fast developing occupational pension fund sectors in France and Germany will ignite demand for longer maturity government bonds.
“European pension reform and new regulations for solvency requirements are set to fuel demand for long maturity government bonds, that could even invert the 10-30 year end of the euro yield curve - reducing risk premium and making it harder for pension funds to fund liabilities,” the report said
The report predicts that the new Dutch pension regulations for solvency requirements, due in the first half of 2004, will pressure pension funds to better match liabilities and increase demand for the longer end of the euro yield curve.
The e475 bn Dutch pension fund market is the second largest in Europe.
The minimum funding requirement legislation introduced in 1997 in the UK also caused inversion at the long end of the UK government bond curve.
Danish solvency regulations for pension and insurance funds introduced in 2001, significantly increased demand for the long end of the euro curve and caused a marked downward correction on euro long-dated forward rates to a new trading range.
Harvinder Sian, fixed income strategist at ABN AMRO said recent legislation allowing funded occupational pensions in France and Germany, will also compound the demand and supply issue.
“A perfect storm scenario is building for the longer end of the yield curve. New Dutch solvency regulation for pension funds will increase risk aversion and also trading up the euro curve. This will be compounded in the medium term by steadily increasing demand for longer term government paper from French and German occupational pension funds,” he added.
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