What are structural risks primarily caused by?

Structural risks are primarily associated with the impact of non-parallel shifts in the yield curve. These shifts occur when interest rates change at different maturities, which can lead to significant changes in the market value of bonds or other fixed-income securities. A non-parallel shift means that the yield curve does not move uniformly across all maturities, causing different durations to react differently to interest rate changes. This creates a mismatch between the interest rate risk faced by a portfolio and its cash flow patterns, leading to potential losses or gains that are difficult to manage or predict.

In contrast, fixed-rate bonds typically have a consistent cash flow and interest payment schedule, which may not be as exposed to shifts in the yield curve as floating-rate instruments. Constant interest rates do not present structural risks in the same way, as they imply no variability or changes to impact cash flows. High coupon rates might indicate more cash flow in the short term but do not inherently cause structural risk. Thus, the complexity and exposure to changes in the yield curve due to non-parallel shifts directly contribute to the structural risks faced by investors.