Duration risk: an antidote for new-year financial market optimism

Global financial markets signal a positive outlook for 2021, but high interest rate sensitivity embedded in assets leaves insurance asset portfolios vulnerable to volatility. 

Key takeaways:

  • Financial market participants have a bullish 2021 outlook, but crowded positioning can in itself be a tail risk.
  • The interest rate sensitivity, or duration risk, in major asset classes is at its highest in about 20 years, making them vulnerable to higher yields.
  • Interest rate risk could be a more severe threat than default risk for credit investors in 2021.
  • We estimate that a 1ppt rise in US yields would lead to mark-to-market losses of at least USD 650 billion on US Treasury bonds alone.
  • Insurers' asset portfolios are at risk of higher volatility. Continuing to strengthen underwriting margins is key.

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