Pensions Are Almost Fully Funded and Coming for Your Bonds

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A “massive rotation” into corporate bonds from equities may be on the horizon for U.S. pension funds as they become fully funded, according to strategists at Bank of America Corp.

Investment gains boosted the funded ratio of the 100 largest corporate plans to 98.8% in May, according to Milliman. That measure of defined benefit pension assets to liabilities has surged from 82% since July 2020, data from the risk management firm show.

If interest rates continue to rise, BofA expects the ratio to top 100%. That would trigger a significant move into high-grade debt by corporate pensions seeking to lock in gains, the bank said in a credit strategy note entitled “The elephant in the room.”

“I think this becomes a pretty big story, and it becomes a support for credit spreads in the back end of the curve especially,” Hans Mikkelsen, BofA’s head of high-grade credit strategy, said in an interview.

Pensions Are Almost Fully Funded and Coming for Your Bonds

Corporate pensions that are over-funded will likely sell riskier assets like equities and buy annuities from insurance companies, Mikkelsen said. Insurance companies would then hedge with mostly longer maturity, investment-grade corporate bonds.

“These are legacy plans. It’s been a headache for a long time for companies to have them and have them be underfunded,” Mikkelsen said. “Now they may be able to make that problem go away without putting any new money into it.”

Private defined-benefit pension plans held $3.5 trillion in assets at the end of 2020, with nearly half of that in equities, according to data from the Federal Reserve.

BofA expects wider high-grade U.S. spreads in the short term, foreseeing a faster rate-hiking cycle than is currently priced in by the market. If that happens, pension reallocation would likely support long-dated credit and flatten the spread curve, Mikkelsen added.

U.S.

MicroStrategy Inc. has boosted the size of a junk-bond sale to fund the purchase of more Bitcoin, now targeting $500 million, according to a person with knowledge of the matter.

  • General Electric Co. is increasing the size of a previously announced tender offer as the company continues to clean up its debt-laden balance sheet
    • GE is now looking to buy back $7 billion of bonds, up from as much as $4.865 billion when the transaction was announced last month
  • Ford Motor Credit Company has drawn its first asset-backed securitization funding through a private facility linked to the Secured Overnight Financing Rate, the company said in an emailed statement
  • Pilgrim’s Pride’s long-term issuer default rating was upgraded by Fitch to BBB- from BB+
  • For deal updates, click here for the New Issue Monitor
  • For more, click here for the Credit Daybook Americas

Europe

Enel was one of 14 issuers raising debt in Europe’s primary market on Tuesday, with marketwide volume of of 23 billion euros ($28 billion), according to data compiled by Bloomberg. Italy amassed 60 billion euros of bids for a sale of euro notes maturing in 2031.

  • The European Union will conduct three syndicated bond sales before the August break under the NextGenerationEU plan designed to help finance its recovery program, according to a call the bloc held with investors
  • Romania’s corporate debt market is growing at a record pace this year, propelled by units of foreign banks including Erste Group Bank AG and Raiffeisen International AG boosting their capital buffers with pioneer transactions

Asia

At least four borrowers offered fresh deals in Asia’s ex-Japan dollar bond market.

  • SoftBank Group Corp. is in talks with banks for a loan of about $7.5 billion tied to the Japanese conglomerate’s planned sale of Arm Ltd. to Nvidia Corp., according to people familiar with the matter
  • Franklin Templeton plans to appeal a ruling by India’s market regulator after the money manager’s local unit was barred for two years from offering new debt funds

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