BofA: Pension De-Risking To Boost Tsy Duration Bid

BofA writes that pension demand is becoming an increasingly important theme in U.S. rates, but downplays the potential impact vs broader macro factors going forward.

• According to BofA, many defined benefits pension funds are nearing fully-funded status, which drives them to lock in these funded ratios and de-risk. They do this by transferring the risk (transferring plans to outside managers incl insurance companies) and/or paying out lump-sums to beneficiaries. This process implies higher demand for high-grade corporate credits and Treasuries, and less demand for equities.
• They conclude that pension de-risking "represent[s] a substantial duration bid - ranging from 6% to 16% of the $600bn in expected annual gross issuance in the 20-30y sector", but "we do not expect pension demand to offset macro factors for higher rates" - as pension demand only partially offsets the Fed's eventual tapering (the Fed is currently buying 30% of gross 20-30Y Tsy supply).
• BofA strategists hold a core 5-30s flattening view and believe the pension bid "should help" with this, but "could work against" their 30Y spread tightening view.