As some U.S. Treasury yields sank to new lows this week, corporate pensions might consider selling bonds in order to raise cash to pay out to beneficiaries, said Bank of America analysts.
The average funded ratios of the top 100 U.S. corporate pensions are expected to fall to the lows seen in 2012 as the U.S. 30-year yield has fallen half a percentage point and yield premiums on corporate bonds too have declined since April, according to Bank of America analysts.
“Corporate bond yields are so low that corporates could consider issuing debt to make their pensions whole and come out ahead,” Shyam Rajan, Bank of America’s interest rates strategist, wrote in a research note.
The average yield on A-rated U.S. corporate bonds is about 2.52 percent, while that on BBB-rated corporates is 3.4 percent, according to Bank of America Merrill Lynch data.
If the U.S. Treasury 30-year yield stays in the low 2 percent level, the top 100 domestic corporate pensions worth $3 trillion would be running a funding deficit of $500 billion, Rajan said.
Companies may not want to their pensions to be stuck in such a funding situation because they would have to pay more insurance premiums on them.