Review of Financial Studies 2026
Long Rates, Life Insurers, and Credit Spreads
Abstract
This paper proposes a new channel through which long-term interest rates transmit to credit spreads. When life insurers carry negative duration gaps, higher rates reduce their liabilities more than assets. Rate increases therefore boost equity and risk-bearing capacity, lowering equilibrium credit spreads. Empirically, I test this channel with bond-level yields and a maturity-based discontinuity in bond ownership. Insurers’ trades confirm the mechanism: after rates rise, insurers shift portfolios towards riskier, high-yield bonds. As rates increase, bonds more heavily held by life insurers experience greater spread reductions. The results show that institutional duration mismatch shapes credit spreads and corporate financing conditions.
- DOI
- 10.1093/rfs/hhag079
- Language
- en
- Sources
- crossref openalex