Despite polticians like President Biden cheerleading his great economic accomplishments and Treasury Secretary Janet Yellen dipping into Social Security to fund the Federal government (much like Biden’s dipping into the Strategic Petroleum Reserve), there are serious problems facing America’s middle class and low-wage workers. Inflation is still brutal (but slowing) and REAL weekly earnings growth has been negative for 21 straight months (meaning that Biden’s bragging about wage growth has been destroyed by the inflation created by his energy policies and massive spending sprees). Personal spending rate YoY has plunged -53.5% to cope with inflation. To quote Joe Biden (Chauncy Gardner), “All is well in the garden.” But all is not well in the garden. As a result, we are now seeing pension funds jumping from stocks to bonds.
(Bloomberg) For some of America’s biggest bond buyers, the soft-versus-hard-landing debate on Wall Street might be a sideshow. They’re getting ready to swoop in with as much as $1 trillion, no matter what happens.
One of the pillars of the trillion-dollar pension fund complex is now awash in cash after struggling under deficits for two decades. This rare surplus at corporate defined-benefit plans, thanks to surging interest rates, means they can reallocate to bonds that are less volatile than stocks — “derisking” in industry parlance.
Strategists at Wall Street banks including JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. say the impact will be far-reaching in what’s already being coined “the year of the bond.” Judging from the cash flooding into fixed income, they’re just getting started.
“The pensions are in good shape. They can now essentially immunize — take out the equities, move into bonds and try to have assets match liabilities,” Mike Schumacher, head of macro strategy at Wells Fargo, said in an interview. “That explains some of the rallying of the bond market over the last three or four weeks.”
An irony of pension accounting is that a year like last year, with its twin routs in stocks and bonds, can be a blessing of sorts to some benefit plans, whose future costs are a function of interest rates. When rates climb, their liabilities shrink and their “funded status” actually improves.
The largest 100 US corporate pension plans now enjoy an average funding ratio of about 110%, the highest level in more than two decades, according to the Milliman 100 Pension Funding index. That’s welcome news for fund managers who suffered years of rock-bottom interest rates and were forced to chase returns in the equity market.
Now, they have an opportunity to unwind that imbalance and Wall Street banks pretty much agree on how they’ll use the extra cash to do it: buying bonds, and then selling stocks to buy more bonds.
Already this year fixed-income flows are outpacing those of equity funds, marking the most lopsided relationship since July.
How much of that is due to derisking by pension funds is anyone’s guess. Some of the recent rally in bonds can be ascribed to traders hedging a growth downturn that would hit stocks hardest.
But what’s obvious is their clear preference for long-maturity fixed-income assets that most closely match their long-dated liabilities.
Pension funds need to keep some exposure to stocks to boost returns, but that equation is changing.
Once a corporate plan reaches full funding, their aim is often to derisk by jettisoning stocks and adding fixed income assets that line up with their liabilities. With the largest 100 US corporate defined benefit funds riding a cash pile of $133 billion after average yields on corporate debt more than doubled last year, their path is wide open.
With yields unlikely to go above their peak level once the Federal Reserve hits its terminal rate of about 5% around the middle of the year, there’s rarely been a better time for them to make the switch to bonds.
Even if growth surprises on the upside and yields rise, causing bonds to underperform, the incentive is still there, said Bruno Braizinha, a strategist at Bank of America.
“At this point and considering where we are in the cycle, the conditions are favorable for de-risking,” Braizinha said in an interview.
JPMorgan’s strategist Marko Kolanovic estimates derisking will lead pension managers to buy as much as $1 trillion of bonds; Bank of America’s Braizinha says a $500 billion buying spree is closer to the mark.
How about gold? As the probability of a US debt default looms (as Bride of Chucky Schumer stomps his feet and says ” No budget cuts!”) and the US Treasury 10Y-3M yield curve remains inverted, gold is soaring.
Perhaps pension funds should by gold rather than cryptos.