Goldman Sachs: Pension Demand, A Slow Normalization

Goldman Sachs note that "long maturity Treasury yields have been resilient in the face of the recent rebound in equity markets and increases in duration supply, raising the question of whether strong demand from the pension community has kept this part of the curve relatively well-supported. To date, historically low yield levels and sizable duration gaps between pension assets and liabilities have limited the improvement in US pensions' funded ratios from the recovery in equities, and we don't expect these ratios to return to levels consistent with de-risking behavior this year. In the past, purchases of Treasuries tended to recover gradually following a steep decline in funded ratios. However, we expect the structural shift seen in recent years to higher fixed income allocations, largely by corporate accounts, to support a continued longer-term bid for bonds, while public plans likely face additional near-term headwinds to their finances before making such shifts. On the whole, this suggests that pensions may not be a ready source of demand for longer maturity debt; for that sector of the yield curve to remain well-supported in an ongoing recovery with still rising long-end supply, other sources of demand (such as the foreign private sector, multi-asset portfolios etc.) will need to remain engaged."