Quantifying the pull-to-par effect for German banks' bond portfolios

Lena Strobel

No 06/2023, Technical Papers from Deutsche Bundesbank

Abstract: The rise in interest rate levels in 2022 led to large losses in German banks' bond portfolios. The resulting unrealised losses also point to reduced profitability and, in the medium term, indicate the risk of further losses arising if unrealised losses end up having to be realised in the process of liquidating bonds. Based on the term structure as at end-2022 and taking into account implied forward interest rates, this analysis quantifies the pull-to-par effect, i.e. future reversals of market price losses which occur when the price of a bond converges towards its par value as it approaches maturity. In addition, the impact of the pull-to-par effect on the recognised net result and on unrealised losses is approximated. The results show how quickly the losses incurred by banks can likely be offset and how quickly risks arising from unrealised losses diminish.

Keywords: market risk; asset pricing; banks; financial stability (search for similar items in EconPapers)
JEL-codes: G12 G21 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubtps:283349

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