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Macro Tourist Presents: The World’s Biggest Steepener
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It's been a while since I have written about German bun
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Seems like the German government’s eventual “fiscal package” may be the bailout of their life insurers…
heres what happened to life insurers in August. There was no initial mismatch of assets and liabilities. However, life insurers assets and liabilities have different convexity. When rates fall, on the asset side, you see more prepayments on MBS and callable bonds, this shortens asset duration. On the liability side, a fall in rates makes financial guarantees more in the money, so as rates fall you see lower lapses and withdrawals and this increases liability duration. The net effect is that life insurers needed to get long duration to bring their assets/liabilities back in line, hence the frantic collapse in the long end. You get the opposite effect when rates rise too fast.