Is there a risk of snapback in long-dated yields?
Long-term interest rates have stayed low in the face of monetary policy normalisation, but experience has taught us that the bond market can change course quite abruptly. Long rates overreact relative to the benchmark where long rates are the average of expected future short rates. As prices are the outcomes of the interaction of many actors, the exact mechanism behind the overreaction varies over time and across markets, but we can sometimes shed light on what is going on without being able to predict when big market moves will happen. I provide a glimpse of the ultra-long segment of the euro area sovereign bond market through the lens of the insurance sector. The holding of ultra-long bonds by German insurance firms has quadrupled since 2008. In turn, yield-chasing may affect market dynamics to lower long-term rates, sparking even greater demand for long-dated bonds. To an outside observer, it would appear as if market participants' preferences were changing with market prices themselves. Low rates beget low rates through higher value placed on long-dated bonds, and high rates beget high rates due to lower value placed on long-dated bonds.