Corporate Pensions Close In on Bond Buying Spree

Corporate DB plans could soon be going on a bond buying spree, according to a report released on Friday by Morgan Stanley.

Years of steady stock gains have pushed many corporate DB plans close to 80 percent funding; when plans get to that funding level, it’s typical to ramp up bond holdings, according to the report.

High-grade, long-term corporate bonds are the most likely to be scooped up by these pension plans.

From Bloomberg:

The biggest gainers may be corporate bonds maturing in around 30 years. Longer-term corporate bonds have risen 1.9 percent this year, including interest payments, compared with around 1.6 percent for the broader investment-grade universe, according to Bloomberg Barclays indexes.

“Pension funds’ sweet spot is out at the long end of the curve,” said Vincent Murray, who heads U.S. fixed income syndicate at Mizuho Securities USA in New York. Investors in some deals he’s worked on this year have placed orders for five times as much 30-year debt as was for sale, he said. “We’ve seen good demand.”

[…]

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.”