Yields Poised to Rise on Pension Funds Reducing Debt Purchases

Since the financial crisis in 2008, pension funds have been in a risk-off mode, foregoing the stock market in favor of safer assets like government debt and investment-grade corporate bonds.

“They’re making these decisions at the same time they have a desire to reduce risk. ‘Buying long Treasurys and long corporate bonds that move in tandem with my pension liabilities are going to reduce my overall financial risk,'” said McDaniel.

The benchmark 10-year yield fell to 2.851 and the 30-year to 3.013, while the 5-year yield rose to 2.729 and the 2-year settled at 2.608 as of 1:00 p.m. ET. Some market experts feel that the pension funds scaling back on bond purchases could send yields as much as 20 basis points higher.

“I think in the near term, we have a very tangible date, which means they’ll probably back away to some degree. I think that weakens the bid (for bonds) for awhile, and maybe they come back if you see equities do well and interest rates go up,” said Michael Schumacher, director rates strategy at Wells Fargo. “They move slowly, but they’re big.”

For more trends in fixed income, visit the Rising Rates Channel.