An Explanation of Negative Swap Spreads: Demand for Duration from Underfunded Pension Plans

An Explanation of Negative Swap Spreads: Demand for Duration from Underfunded Pension Plans

  • SVEN KLINGLER
  • SURESH SUNDARESAN

Article first published online: 13th December 2018 DOI: 10.1111/jofi.12750

Abstract


The 30‐year U.S. swap spreads have been negative since September 2008. We offer a novel explanation for this persistent anomaly. Through an illustrative model, we show that underfunded pension plans optimally use swaps for duration hedging. Combined with dealer banks' balance sheet constraints, this demand can drive swap spreads to become negative. Empirically, we construct a measure of the aggregate funding status of defined benefit pension plans and show that this measure helps explain 30‐year swap spreads. We find a similar link between pension funds' underfunding and swap spreads for two other regions.

Sign in to access the full article.

Related articles


ISSUE INFORMATION BM

Article first published online: 7th March 2019 / DOI: 10.1111/jofi.12630

Read Article

AMUNDI PIONEER AND BRATTLE GROUP PRIZES FOR 2018

Article first published online: 7th March 2019 / DOI: 10.1111/jofi.12767

Read Article

MISCELLANEA

Article first published online: 7th March 2019 / DOI: 10.1111/jofi.12626

Read Article

ANNOUNCEMENTS

Article first published online: 7th March 2019 / DOI: 10.1111/jofi.12627

Read Article

ISSUE INFORMATION FM

Article first published online: 7th March 2019 / DOI: 10.1111/jofi.12629

Read Article

Who Finances Durable Goods and Why It Matters: Captive Finance and the Coase Conjecture

  • JUSTIN MURFIN
  • RYAN PRATT

Article first published online: 20th December 2018 / DOI: 10.1111/jofi.12745

Read Article

Are you an Author?


Please read our submission requirements and find out how to submit your paper to the Journal of Finance

Submit a paper