Biden’s Pension Rescue Seen as Bigger Help for Corporate Bonds

U.S. President Joe Biden’s planned pension rescue could result in even more money being shunted into investment-grade corporate bonds than previously thought, according to Citigroup Inc. strategists.

The Pension Benefit Guaranty Corp., which insures pensions, issued rules on Friday for bailout money for multi-employer plans that are severely underfunded. These plans can apply for rescue funds as part of the $1.9 trillion pandemic-relief bill signed into law in March.

The PBGC said that the pensions are eligible for $94 billion of assistance, which is higher than the $86 billion that Citigroup strategists estimated in May. And the government agency said it is limiting the types of investments the pensions can make with the rescue funds to individual investment-grade fixed-income securities, or funds such as exchange-traded funds, mutual funds or pooled trusts. That increases the “likelihood that funds are channeled” into high-grade bonds, Citi’s Daniel Sorid and James Keefe wrote in a note late Friday.

“For now, we continue to believe the majority of funds will be invested in investment-grade bonds,” the strategists wrote.

The 124 weakest multi-employer plans were hit hard early in the pandemic, with plunging markets resulting in their only being 34% funded, compared with 74% at the end of 2007, according to a report from actuarial firm Milliman.

PBGC signaled its willingness to consider other investments for pensions, and will review public comments on the topic, according to the strategists. According to the interim final rule, with low yields on bonds now, it wants to learn more about the benefits and risks of allowing investments in other kinds of instruments that are similar to bonds, such as preferred securities and insurance contracts.

The provisional rule allows pensions to buy U.S. dollar-denominated debt from overseas. It will also allow a 5% buffer for high-grade debt that falls into high-yield, and allows for fund vehicles that have an average credit quality of high-grade, weighted by market value, potentially allowing mixed investment-grade and high-yield funds, Citi strategists wrote.

The recipients of the rescue money will probably transform from badly underfunded into well-funded plans, which in turn would probably spur them to look for longer-term assets to buy, the strategists wrote. That may create demand pressure on bonds maturing in 15 years or more, according to the bank.

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