“I get that you have to be patient, but at some point the central banks do realize they have to restore government bond yields to a rational, positive level of real yield,” said Bob Michele, global head of fixed income at J.P. Morgan Asset Management. “Insurance companies and pension funds, you’ve removed the ability for them to de-risk, and you’ve also inflated their liabilities. At this level of bond yields, they’ll never be able to generate the 7% return on an ongoing basis that they need. They can absorb it over the short term, but longer term, it’s a reason to raise rates.”

In July, when 30-year Treasury yields were around 1.3%, Bank of America Corp. strategists warned that pension managers would revolt and stay away from the world’s biggest bond market until yields increased by “at least” 50 basis points. Otherwise, adding Treasuries would only “lock in such large funding gaps and also lock in low rates of return on the bonds.” Five months later, the long bond hasn’t yet reached 1.8%, while the benchmark 10-year yield remains stubbornly below 1%.

While investors refuse to sell Treasuries, they’re also not keen on shedding stocks, either. The S&P 500 Index has moved in an almost linear fashion higher since the worst of the coronavirus pandemic in March and April. It got to the point where I wrote that Chicago should be cheering on September’s decline in U.S. technology stocks so its underfunded pensions could buy the dip, potentially by issuing bonds to raise the funds. That drop didn’t last long.

“A drawdown in the market is a good thing,” said Nick Maroutsos, head of global bonds at Janus Henderson Investors. Without that, “it can be a problem because it’s going to hurt earnings, it’s going to hurt return expectations and just overall returns for future generations. And the lessons it teaches — any sort of selloff, you just buy it, knowing full well that defaults will be limited, money will be provided, liquidity will be there.”

Now, pensions are left with little choice but to risk it all and buy stocks near their all-time highs or give even more money to hedge funds or distressed credit managers. The alternative of adding investment-grade corporate bonds that yield less than 2% is a non-starter, to say nothing of Treasuries.

This is by design. Even if the Fed can’t as easily fire up its credit facilities in 2021, investors know they’re an option during periods of crisis. It’s enough to have potentially changed markets forever. Unfortunately, the central bank’s commitment to ultralow interest rates for years has also put defined-benefit plans on track for significant struggles ahead.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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