Interest Rate Sensitivity of Irish Bond Funds

Ilaria Gianstefani, Naoise Metadjer and Kitty Moloney
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Ilaria Gianstefani: Central Bank of Ireland
Naoise Metadjer: Central Bank of Ireland

No 10/FS/23, Financial Stability Notes from 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.

Date: 2023-12
New Economics Papers: this item is included in nep-ban and nep-ifn
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