(September 23, 2013) — UBS investment research has forecasted a significant flow of US defined benefit (DB) pension capital from equities into bonds by the close of the third quarter (September 30).
Strategists Boris Rjavinski and Matthias Rusinski projected between $35 billion and $41 billion in public equity sales, coupled with fixed income buys of $19 billion to $22 billion.
Strong stock market returns and lackluster performances from US investment-grade fixed income for the month and quarter-to-date drove these projections.
Domestic equities skyrocketed with a small cap index in the lead with 10% rise this quarter so far. International equities showed strong returns as well and an emerging market equities index increased 8.48% for the quarter-to-date.
Bond performance, on the other hand, was relatively flat. The mainstream index cited by UBS increased less than 0.5%, UBS found.
UBS concluded that inflows to fixed income could help US government bonds. With the Federal Reserve’s ‘tapering’ on the table, heavy buys by pension funds could slow down a considerable exit of capital from bonds and lower the Treasury yield.
While Treasury auctions of $97 billion total this week may slow down pension funds’ immediate demand for bonds, it is projected that pensions’ longer-duration contracts would allow for a gradual shift in assets over a longer period of time.
The research also found that corporate plans’ trend towards de-risking strategies and liability-driven investments will drive further inflows to fixed income.
Historical data showed that 2013 is the third year in a row when third quarter pension rebalancing estimates were significant.
Corporate pension funds’ demand for longer bonds are expected to grow and see major net new contributions in 2013.
However, UBS advised pension funds to weigh rising bonds yields with a potential of drying up of liquidity when considering further corporate and government bonds purchases.
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