What Is a Long-Dated Asset?

A long-dated asset is a type of income-generating asset, such as residential mortgages and 30-year bonds, where the revenue streams occur until that asset's maturity date (which is well into the future).

Key Takeaways

  • A long-dated asset is a type of income-generating assets—such as residential mortgages and 30-year bonds—where the revenue streams occur until that asset's maturity date (which is well into the future).
  • Pension funds and insurance companies invest in long-dated assets to match their long-term obligations.
  • Long-dated assets carry greater duration risk.

Understanding a Long-Dated Asset

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

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 stream 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 mortgage-backed securities. 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 origination.

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 assets and liabilities is severe enough.

Types of Long-Dated Assets

Residential Mortgage-Backed Securities (RMBS)

Residential mortgage-backed securities (RMBS) are a type of debt-based security that backed by the interest paid on loans for personal or family residences. The interest on loans such as mortgages, home-equity loans and subprime mortgages is considered to be something with a comparatively low rate of default and a comparatively high rate of interest, since there is a high demand for the ownership of a personal or family residence. 

Commercial Mortgage-Backed Securities (CMBS)

Commercial mortgage-backed securities (CMBS) are fixed-income investment products that similar to residential mortgage-backed securities but they are backed by mortgages on commercial properties rather than residential real estate. The underlying securities of CMBS may include a number of commercial mortgages of varying terms, values, and property types—such as multi-family dwellings and commercial real estate.

Treasury Bonds

Treasury bonds (T-bonds) are government debt securities issued by the U.S. Federal government with maturities greater than 20 years. T-bonds earn periodic interest until maturity. At this point, the owner is also paid an amount equal to the principal.

Municipal Bonds

Municipal bonds are debt securities issued by state and local governments. Municipal bonds are used to fund public works, such as parks, libraries, bridges and roads, and other infrastructure.