Corporate Pension Bond Bulls Could Further Flatten the US Treasury Yield Curve

Fear of a downturn creates a rise in de-risking.

The yield curve may keep flattening due to more corporate pensions looking to de-risk by moving their assets into fixed income.

According to Reuters and a report from Seattle-based consultant Milliman, the US equities rally of 2017 and larger pension contributions helped bridge the gap for corporate pension plans between assets and pension liabilities by $72.4 billion.  

According to Milliman’s 2018 Corporate Pension Funding Study, the average funded status ratio for the 100 largest corporate US plans in 2017 was at 86%, up five percentage points from 2016.

While positive returns kept optimism bright, many plans have decided to shift a chunk of their assets into a lower-risk environment as not to repeat some of 2008’s mistakes, as economists and institutional investors such as Bridgewater Associates Ray Dalio predict a downturn in the coming years.

Reuters reports that equities being converted into long-term debt has increased demand for corporate bonds as well as 10- and 30-year US Treasuries. Although the 10-year Treasury yield broke 3% on Tuesday, the curve is still flatter than it was at the beginning of the year.

According to Reuters, a total $1.5 trillion of corporate pension assets could boost bond rates enough to flatten the long end of the yield curve, which has been occurring aggressively over the past six-12 months.

Michael Moran, chief person strategist at Goldman Sachs Asset Management, told Reuters that although there is some speculation about how much money will go towards fixed income, it’s possible for US corporate pension plans to buy roughly $150 billion in high-quality, long-duration fixed income every year for the next several years.

Tags: , , ,