Dutch pension funds are plowing cash into long-dated swap contracts, according to strategists, upending one of this year’s most popular trades.

The funds, by far the region’s largest with more than €1.5 trillion in assets, are likely bidding up the paper to hedge for growing liabilities, strategists at Citigroup Inc. and Barclays Plc said.

Last week, 20-year rates dropped the most relative to 10-year securities since June. For most of this year, long-dated yields rose faster than short maturities, steepening the curve as investors bet that interest rates will be kept high.

The latest moves come after the Netherlands’ second biggest fund, PFZW, announced last week a sizable increase to pension payments starting in 2024, spurring talk about others following suit with announcements due in the coming weeks.

“These hedges are likely to be positioned in long-end swaps, putting flattening pressure on the €10s20s/10s30s swap curve,” said Aman Bansal, a strategist at Citigroup Inc. in a client note.

Citi’s Bansal said the “crowded” positioning in steepeners helped exacerbate last week’s moves as investors rushed for exit due to the impact from pension fund buying.

He added the lack of supply of core cash paper also contributed to the move, with the Netherlands announcing it won’t issue more bonds this year, which limits investment options for funds.

PFZW announced an increase of 4.8% in 2024 payments, way above the nation’s inflation rate, which has recently turned negative. It was also a big shift from 2022, when the fund underpaid pensioners relative to consumer-price growth. The fund didn’t immediately respond to a request for comment.

Rohan Khanna, head of euro rates strategy at Barclays, said bids from Dutch funds have “muddied the waters” for euro swap markets in the short term.

Still, he added that PFZW is likely to be an outlier among its peers, while counterpart ABP has suggested a maximum 3% adjustment.

Pension fund demand for long-end securities is not only confined to swaps, with another fund APG announcing last month the purchase of €600 billion of green government bonds maturing in 2044. That accounted for half of the allocation to pension funds and insurance companies, according to data provided by the Dutch State Treasury Agency.