January 29, 2014 11:57 am

Pension plan rotation boosts US Treasuries

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US government bonds are on course for their best monthly performance since the summer of 2012 as big pension funds have cashed in their equity gains and moved into long-dated Treasury debt.

Many investors view long dated bonds as the one asset class to avoid this year as the Federal Reserve’s taper comes into effect. The central bank began reducing its bond buying this month and is expected to accelerate that move by a further $10bn after its policy meeting concludes on Wednesday.

Yet so far this month, the total return generated by the Barclays Treasury index of long dated bonds is nearly 5 per cent, its best monthly performance since May 2012. It reflects how yields on 30-year Treasury bonds, which move inversely to prices, have dropped from just under 4 per cent at the start of January to a low of 3.62 per cent.

The sharp decline in Treasury yields has been driven in part by the eruption of concerns about many emerging markets that in turn have rippled back to the US and weighed on domestic equity prices. So far this month, the S&P 500 has eased 4 per cent, after registering a gain of 30 per cent last year.

“When risk assets get hit, Treasury debt benefits,” said Ian Lyngen, strategist at CRT Capital. He said last year’s rise in bond yields has largely priced in the Fed’s taper.

While all sectors of the Treasury market and other types of bonds have risen in value this month, the move has been led by the so-called long end, whose price is more sensitive to changes in underlying yields than shorter maturity paper.

One important source of support has been the strong buying presence of pension plans this month.

The best annual return on equities since 1997 greatly boosted the funding position of many US pension plans, which started the year by cashing in their equity gains and switching into long-dated bonds.

“Pension plans got a nice shot in the arm from the rally in equities and now is the time to immunise those gains by getting back into long dated bonds,” said Jay Mueller, senior portfolio manager at Wells Capital Management.

Now, the prospect of a switch out of bonds and back into equities beckons.

“Given the performance of equities and bonds so far this year, we may see some investors go back to stocks as they are now cheaper and bonds have appreciated,” said Mr Lyngen. “We still expect higher bond yields by the end of the year, but as this month has shown, it won’t be a straight move higher.”

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