The investment shifts may end up helping companies in another way: by reducing their borrowing costs, as demand from pension funds cuts their yields. That’s a big deal in a year when the Federal Reserve is widely seen by market participants as likely to continue raising rates.
Bond prices have climbed recently amid steady demand from investors, who poured $2.71 billion into funds that buy investment-grade debt last week, according to data provider Lipper. Yields have held near historical lows, with the average Friday at 3.3 percent.
If equity markets keep gaining, pensions will probably cut even more risk and add corporate bonds, said Owais Rana, who heads a group that advises pensions at asset management firm Conning in Hartford, Connecticut. Non-public pension funds, including companies’, held around $562 billion of corporate bonds at the end of 2016, up from $551 billion a year earlier, according to U.S. Federal Reserve data.
“There’s going to be an improvement in funding levels if all the economic theories that we’re thinking about will come to fruition,” Rana said.
But even if stocks don’t rally much from here, some pensions may have other reasons to cut their equity allocations, including reducing the fluctuations in their returns and grabbing scarce long-duration, high-rated corporate bonds while they can, said Michael Moran, chief pension strategist at GSAM.
For long-term corporate bonds, it’s unlikely that new-issue supply will be able to meet demand in the near term. Until supply catches up, yields -- particularly on 30-year debt -- will likely sink, according to Hans Mikkelsen, head of high-grade credit strategy at Bank of America Corp.
“Pensions have a natural bias toward buying long-duration bonds,” Mikkelsen said. “The initial move is going to be lower long-term yields, and selling equities.”
This article was provided by Bloomberg News.