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Interest Rate Sensitivity of Irish Bond Funds

Author

Listed:
  • Gianstefani, Ilaria

    (Central Bank of Ireland)

  • Metadjer, Naoise

    (Central Bank of Ireland)

  • Moloney, Kitty

    (Central Bank of Ireland)

Abstract

The significant growth in the investment fund sector coupled with recent increases in interest rates pose questions regarding the sector’s vulnerability to shocks and its potential for amplifying systemic risk. In this Note we assess the sensitivity of cohorts of bond funds to a large one-off increase in interest rates by developing a tool to measure the impact on funds’ net asset value (NAV). The results split by fund cohorts, show thatlosses increase with weighted average maturity of assets and with the proportion of fixed coupon bonds (Government and Emerging Market Bond Funds experiencing the largest losses). These losses have the potential to trigger larger than usual outflows, particularly for underperforming investment funds within cohorts. This Note highlights existing balance sheet and redemption vulnerabilities - such as relatively high leverage in Mixed Corporate Bond Funds – which may affect the resilience of cohorts beyond what is modelled in this Note. We also apply the ESMA stress test to assess the joint impact of an interest rate and a credit shock and find somewhat similar results. The tool developed here has been incorporated into our ongoing financial stability Risk Assessments, which inform both policy and supervision.

Suggested Citation

  • Gianstefani, Ilaria & Metadjer, Naoise & Moloney, Kitty, 2023. "Interest Rate Sensitivity of Irish Bond Funds," Financial Stability Notes 10/FS/23, Central Bank of Ireland.
    • Handle: RePEc:cbi:fsnote:10/fs/23
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    File URL: https://www.centralbank.ie/docs/default-source/publications/financial-stability-notes/interest-rate-sensitivity-of-irish-bond-funds.pdf?sfvrsn=e1999d1d_5
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    References listed on IDEAS

    as
    1. Daly, Pierce & Moloney, Kitty, 2017. "Liquidity & Risk Management: Results of a Survey of Large Irish-Domiciled Funds," Quarterly Bulletin Articles, Central Bank of Ireland, pages 48-62, July.
    2. Falato, Antonio & Goldstein, Itay & Hortaçsu, Ali, 2021. "Financial fragility in the COVID-19 crisis: The case of investment funds in corporate bond markets," Journal of Monetary Economics, Elsevier, vol. 123(C), pages 35-52.
    3. Cima, Simone & Killeen, Neill & Madouros, Vasileios, 2019. "Mapping market-based finance in Ireland," Financial Stability Notes 17/FS/19, Central Bank of Ireland.
    4. Philip R. LANE & Kitty MOLONEY, 2018. "Market-based finance: Ireland as a host for international financial intermediation," Financial Stability Review, Banque de France, issue 22, pages 63-72, April.
    5. Fiedor, Pawel & Katsoulis, Petros, 2019. "An Lonn Dubh: A Framework for Macroprudential Stress Testing of Investment Funds," Financial Stability Notes 2/FS/19, Central Bank of Ireland.
    6. Nicola Cetorelli & Fernando M. Duarte & Thomas M. Eisenbach, 2016. "Are Asset Managers Vulnerable to Fire Sales?," Liberty Street Economics 20160218, Federal Reserve Bank of New York.
    7. Baranova, Yuliya & Coen, Jamie & Noss, Joseph & Lowe, Pippa & Silvestri, Laura, 2017. "Simulating stress across the financial system: the resilience of corporate bond markets and the role of investment funds," Bank of England Financial Stability Papers 42, Bank of England.
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