Staff Working Paper No. 1,031
By Umang Khetan, Jian Li, Ioana Neamtu and Ishita Sen
We provide the first comprehensive characterisation of end-user demand and its asset pricing implications for the interest rate swap market. Pension funds and insurers act as natural counterparties to banks and corporations, but their demand is highly segmented by maturity, exposing dealers to maturity-specific imbalances. We estimate demand elasticities using portfolio compression as an instrument, and calibrate a preferred-habitat model to quantify how demand imbalances interact with intermediary constraints to shape the term structure of swap spreads. In policy counterfactuals, we quantify the cross-sector implications of changing hedging mandates, eg, showing that a decrease in pension funds’ demand worsens banks’ hedging outcomes.
This version was updated in August 2025.
The market for sharing interest rate risk: quantities and asset prices
