It is sometimes said that “pension and insurance hedgers push the long end of the curve down” Explain how this happens and why- what are the connected steps? What do these players do and why? How does this result in curve moves? Also – how does this activity affect inflation curves?
This is an issue for legacy Defined Benefit pension funds, that promise to pay a fraction of salary for time worked. Virtually nobody offers these schemes these days; but enough (usually older, and often public-sector) workers and retirees still have related entitlements thus.
These assets to the employee are obviously the liability of the employer's pension fund. The question is how these are valued, from an Asset/Liability Matching perspective. This can vary from country to country; but the general rule is that pension funds have to discount (and fund accordingly) based on regulator-specified longevity and discount rate assumptions.
These discount rates are usually very long-dated interest rates... so these represent a natural hedge for pension funds. Suppose that the 10y rate is say +1% and the 10y10y is say -1%, the 10y rate might be "riskier" to a pension fund than the 20y, even though the economics of this are clearly bonkers!!!
Regulation incentivises DB funds to receive long-dated rates at any price. This incentive can distort the price, because who is the natural seller on the other side of this pension tsunami?