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Investing.com -- Dutch pension reforms are set to exert upward pressure on longer-dated euro interest rates, with potential unwinding of interest rate hedges creating a €500 million DV01 impact, according to analysis from ING.
The transition is expected to steepen the euro yield curves, particularly affecting rates of 30-year maturities and longer.
Meanwhile, demand for shorter-dated hedges up to 20 years will remain strong and could increase in some cases, likely translating to a steepening of the 20s30s curve.
ING notes that pension funds will likely prefer to unwind longer-dated swaps before bonds, as 30-year bonds currently trade at higher yields than swaps.
This preference has already contributed to the swap curve steepening approximately 15 basis points more than the Bund curve in recent months, with Dutch pension funds potentially driving about 10 basis points of this differential.
The current average interest coverage ratio stands at 68%, but could decrease to 40% after reforms.
Pension funds have been adding to their hedging since the beginning of the year, with each percentage point increase in interest coverage ratio estimated to add around €20 million to the DV01 flows upon transition.
Beyond hedge unwinding, a broader rebalancing of fixed income portfolios is anticipated. Government bonds will lose their preferential risk weighting treatment, potentially reducing European government bond demand by approximately €100 billion.
ABP, a major Dutch pension fund, has already published plans to shift around €25 billion away from government bonds toward other credits.
Dutch mortgage portfolios are expected to gain prominence in pension fund allocations due to their attractive risk-return characteristics.
While about half of assets under management still plan to transition on January 1, 2026, delays remain possible.
The Dutch central bank will release new data on interest coverage ratios on September 18, and upcoming elections on October 29 could potentially impact the timeline, though ING doesn’t currently expect pensions to be a major electoral issue.