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Public corporate pension funds thanks to the over 30% gain in SP500 last year and the rise in rates which lowered the net present value of the liabilities many are 100% to 110% funded. At the end of the first quarter a number of large pension funds were up 8% on the year because of there holdings in the MOMO stocks 

( Amozon , Facebook, Netflix ect ) and with the Net present value of their liabilities lower it became attractive to reduce growth assets and increase hedge assets. I think this explains the decline in Momentum stocks in April and the strong bid for long dated fixed income. The question is this asset reallocation over. The answer is no! Big picture there are 16T in Private pension fund assets and 12T in US treasuries so this story will continue to play out as our population ages and preference for fixed income increases. This does not mean there well be no demand for Equities as the Millenniums starts building their 401K holdings. I think during the month of   May we will see the Treasury curve continue to flatten in spite of dealer skepticism because of tapering and better economic news and Equities continue to consolidate near the highs and maybe make new all time highs but not begin another wave up. For interest sake JPM active client survey show  0 longs this week and Nomura says that speculators and other short term investors have the largest net short in Treasury bond and Euro dollar futures since the tracking started in 1995. 

Unlike the promulgated concept that lower note yields are “telling us something” about equity markets; this brief from a friend is much more interesting. The pension fund asset/liability match shows that high(er) yields are not a prerequisite for shift when overweight equity positions produce. At the ground level, many older savers have also been “theoretically overweight” in their IRAs. The old adage was a bond allocation equal to your age – the “extended period” ZIRP changed that metric. Many retirees remain exposed to equity volatility well into their 80s.

The Boomer Dream was to lever up in real estate and equity and gear down into the second home in Florida with 6% treasury bonds. The crisis changed all that, however, 6 years post the transition is occurring at 2.75%. Welcome to the Del Boca Vista Phase II market.

 

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