Long-Dated Asset

A long-dated asset is a type of income-generating assets with a revenue stream that occurs over a long period of time until maturity. Residential mortgages and 30-year bonds are examples of long-dated assets.

Long-dated assets carry greater duration risk. If a holder of long-dated assets employs a liability-matching strategy and interest rates rise, the fixed interest income from the long-dated assets that the holder receives over many years may not cover the long-dated liabilities. For example, banks generally hold-long dated assets such as residential mortgages. Banks also have interest-sensitive liabilities such as demand deposits from savings accounts. Since the income generated by mortgages tends to be steady over the life of the loans, the amount of money the bank receives from mortgages is limited to the rates that prevailed at the time of the loan originations. However, cash outflows from demand deposits are not generally limited and will increase in a rising interest rate environment. The result would be a reduction in net interest margin for the bank and possibly financial distress if the mismatch between long-dated asset and liabilities is severe enough.

Pension funds and insurance companies invest in long-dated assets to match their long-term obligations. These institutional investors purchase residential and commercial mortgage-backed securities (RMBS and CMBS), 30-year corporate, municipal and Treasury bonds, and other long-dated assets to receive ongoing cash flows to meet their payment obligations. The assets can be traded away for other long-term investment substitutes or held to maturity.

The life insurance companies belonging to American International Group, Inc., an insurer, "use asset-liability management as a primary tool to monitor and manage risk in their business. [Their] fundamental investment strategy is to maintain a diversified, high-quality portfolio of fixed maturity securities that, to the extent practicable, complements the characteristics of liabilities, including duration." The 10-K filing further explains that "an extended low-interest rate environment may result in the lengthening of liability durations from initial estimates, primarily due to lower lapses, which may require us to further extend the duration of the investment portfolio."