Long-Dated Asset: Definition, Function, and Types

Definition

A long-dated asset is an income-generating asset, like residential mortgages and 30-year bonds, with revenue streams that extend until the asset’s maturity date.

Key Takeaways

• A long-dated asset generates income until its maturity date, making it appealing to pension funds and insurance companies.
• Long-dated assets come with duration risk.

Function of a Long-Dated Asset

Pension funds and insurance companies invest in long-dated assets to align with their long-term obligations. They may acquire residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), 30-year corporate bonds, municipal bonds, Treasury bonds, or other long-dated assets to fulfill payment duty. These assets can be either traded or held to maturity.

However, investing in long-dated assets carries duration risk. In the event of rising interest rates, the fixed interest income received over the course of many years may be insufficient to cover the long-dated liabilities.

For instance, banks typically hold long-dated assets like residential mortgage-backed securities, while also having interest-sensitive liabilities such as deposits from savings accounts. Due to the stable income generated by mortgages throughout their lifespan, the bank’s earnings from mortgages are limited to the prevailing rates at the time of loan origination.

On the other hand, cash outflows from demand deposits are not restricted and would rise during a period of increasing interest rates. This could decrease the bank’s net interest margin and potentially lead to financial instability if there is a significant mismatch between long-dated assets and liabilities.

Types of Long-Dated Assets

Residential Mortgage-Backed Securities (RMBS)

RMBS are debt-based securities backed by the interest paid on loans for personal or family residences. These loans, including mortgages and home-equity loans, carry a relatively low default rate and high interest rate due to the demand for personal or family residences.

Commercial Mortgage-Backed Securities (CMBS)

CMBS are fixed-income investment products similar to RMBS, but they are backed by mortgages on commercial properties. The underlying securities of CMBS consist of various commercial mortgages with different terms, values, and property types, such as commercial real estate and multi-family dwellings.

Treasury Bonds

Treasury bonds (T-bonds) are government debt securities issued by the U.S. federal government with maturities exceeding 20 years. T-bonds earn periodic interest until maturity, at which point the owner is also repaid the principal amount.

Municipal Bonds

Municipal bonds are debt securities used by state and local governments to finance public works projects, including parks, libraries, bridges, roads, and other infrastructure.