Long Rates, Life Insurers, and Credit Spreads

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ID: 327212
2026
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Abstract
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. (JEL G12, G22, G23, E50)
Reference Key
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Authors Ziang Li
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Journal review of financial studies
Year 2026
DOI
10.1093/rfs/hhag079
URL
https://doi.org/10.1093/rfs/hhag079
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