U.S. Pension Funds Hold Clue to Relief for Slumping Treasuries

(Bloomberg) - U.S. pension funds may be primed to take advantage of higher yields in global bonds and could put a floor on the market’s slump.

Pension funding versus liabilities was close to 100% at the end of 2021, for the first time since the financial crisis, according to investment advisory firm Milliman, based on data from 100 U.S. public companies sponsoring the largest defined benefit pension plans. Such funds could be “keen to lock in” that status and turn to the government bond market to de-risk, according to portfolio managers at Man Group.

“This illustrates that rates do not need to rise an awful lot from here, even if inflation stays stubbornly high,” said Man Group portfolio managers including Teun Draaisma in a report, adding that “soaring” bank deposits could also incite greater demand for government debt.

Yields on 10-year Treasuries have surged more than 30 basis points so far this year, taking them to pre-pandemic levels and close to 2%. Many analysts see that level being broken as the Federal Reserve is expected to hike rates several times this year to combat high inflation.

Pension buying tends to be concentrated on longer-dated debt, leaving that part of the curve a key beneficiary. At the moment, the spread between 10- and 30-year Treasury yields is at its flattest since 2019.

Pension funds and insurers may start actively buying U.S. Treasuries at current levels, Mizuho Bank strategist Vishnu Varathan said this week.

“Real yields are negative but if you believe that U.S. inflation is done peaking this year, then the real returns start to become very compelling and the patient money would want to get in now and hold,” he said.

By Libby Cherry


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