Recent signals suggest delay risks are significantly reduced
DNB, the Dutch central bank, has already approved a number of pension funds transitioning in 2026 and has sent out strong signals that a total of thirty funds should make the move on 1 January. The three largest funds on the agenda – PFZW, Bouw and PMT – have all started sending out example calculations of the new pensions to their participants. Markets have been watching closely, with clear jumps in the 10s30s around headlines on the funds’ progress.
Whilst PFZW and PMT are still awaiting official approval from DNB, their communication reflects a high degree of confidence about being on track. We therefore estimate that around €600bn of assets should transition in less than three months.
Ultra-long end is adding to steeper EUR curve
The steepening of the 10s30s is mostly driven by global factors, but a comparison with other parts of the curve suggests pension funds may also be playing their part. Dutch pension funds are one of the few players in the swap market with maturities of 50Y, and therefore any flows can translate to sharp moves. Since the start of this year, the 30s50s curve has steepened by more than 20bp, more than the US SOFR curve. The sharp move higher in February may have been driven by a Dutch pension fund pre-emptively unwinding 50Y exposures.
Whilst difficult to say with certainty, we do believe the steepening of the EUR 10s30s would not have followed the US as closely without the upward pressure from the ultra-long end. The EUR 5s10s curve, which is a key driver of the 10s30s, steepened less than the US. This, by itself, would argue for a relatively flatter 10s30s
Whilst the majority of flows from pension funds will only start at the beginning of 2026, we do expect many financial players to anticipate these, limiting the immediate market impact. In fact, we also see risks of the market being over-positioned, which could lead to flattening pressures in January. In any case, long-end volatility is expected to remain high in the coming months, with the anticipation of indexation flows also pushing in the opposite direction. Already in the pricing of swaption markets we see elevated levels of implied volatility for 30Y tenors compared to shorter tenors and also compared to US volatility.
Credit could benefit as funds rebalance their fixed income portfolio
Besides a shortening of maturities for bonds and swaps, we also foresee other tweaks in the asset allocation, albeit the size and direction are less clear so far. PFZW (€250bn assets) intends to increase their exposure to euro investment-grade credit and Dutch mortgages, at the expense of euro govies and emerging market local currency debt. The pension fund Bouw wants to increase its allocation to high yield and alternative credits, and decrease its exposure to developed market equities.
A strategic asset allocation update from ABP earlier this year showed a decrease in government bonds and an increase in credit, too. The funds do not explicitly mention allocations to sub-sovereign, supranational and agency (SSA), but we do see opportunities here as these tend to closely follow the swap curve for hedging purposes while offering a slight yield pickup. The overall direction seems clear: government bonds will lose out, whilst credits should gain.
PMT does not explicitly mention changes to their portfolio after transitioning, but they are very transparent about their current holdings. Out of their portfolio of €90bn, around €18bn is invested in government bonds. The portfolio is tilted towards German and Dutch govies, but also Latin American countries contribute a significant portion. Austria is popular too, which is likely driven by the issuance of relatively long-dated bonds. Given the lesser need for longer-dated hedges, we can imagine seeing some shifts here. We also expect the holdings of Dutch government bonds to decrease, but data from 2Q25 still showed an upward trend in exposures.
Four reasons why we doubt we will see a lot of flows before 2 January:
While pension funds may already shorten the maturities of their interest rate hedges from 30Y+ to 20Y and below, the majority of flows will only come in after the transition dates. Smaller funds may decide to preload some of their trades to benefit from a first-mover advantage, but this will be more of an exception than the norm.
Here are those 4 reasons:
- Until 1 January, pension funds are bound to the regulatory framework of the old system, which gives them limited space in their mandate to adjust interest hedges pre-emptively.
- Unwinding interest rate hedges before 1 January exposes the funds to excessive market risk, which could lead to public controversy if we have a market shock in the last days of the year. The most recent data from 2Q25 actually showed another increase in hedging ratios.
- PMT, one of the major funds transitioning, has published a plan that indicates a six-month window to unwind positions starting from 1 January. This suggests no trades before the transition date.
- Market liquidity around Christmas is poor, so this would make trading large blocks more difficult anyway.
