solution to question 23 on page 160 of reading 25 (vol 4). it says given that the yield curve is flattening and that liability duration >asset duration, this would cause liabilities to increase faster than assets. What is the reasoning behind this?
a flattening yield curve refers to long rates falling while short rates stay constant thus causing the liabilities to increase faster because of their higher duration relative to the assets
Given the current steep upward-sloping yield curve, the yield curve could move up to be flat. This will cause the asset to decrease faster than the liability.
Or, as described in the answer, if the yield curve (move down) to be flat, the liabilty will increase faster than the asset.
In either case, it’s a concern.