The Great Bond Revolution?

(November 5, 2013) — UK pensions dropped significant amounts of corporate bonds in favour of government-backed securities in the run up to March this year, research showed today—but has that trend already reversed?

The eighth annual Purple Book, published by the UK’s Pensions Regulator and Pension Protection Fund, showed UK pensions had switched around their bond portfolios by the end of March 2013.

“The corporate fixed interest securities’ allocation decreased from 44.8% in 2012 to 40.6% in 2013,” the book reported. “Meanwhile, the proportion of government fixed interest rose from 17.7% to 18.5%.”

The Purple Book collects data from more than 6,000 mainly corporate UK pension funds and reports annually on asset allocation and risk tolerance.

Some of this change in allocation may have been due to many more pensions moving into index-linked securities, most of which are issued by governments and other centrally-backed financial institutions.

“The balance of holdings in index-linked rose to 40.9% from 37.5% in 2012,” the book said.

However, since March 2013 bond markets have experienced shockwaves from the US Federal Reserve. After announcing the prospect of a tapering of quantitative easing in May, Fed Chairman Ben Bernanke sparked a large bond sell-off around the world.

Investors have returned to buying fixed income, but with a penchant for corporate debt.

Last week saw the seventh straight inflow to high-yield bond funds by international investors, Bank of America Merrill Lynch said in an analyst note. This compared to smaller flows to investment-grade bond funds—$3.7 billion vs £300 million—while investors withdrew $1.4 billion from government bond funds, marking that category’s seventh straight week of outflows.  

Year-to-date, investors have pulled $16.2 billion from global government bond funds and allocated just over the same amount to global high yield, the bank said.

Investment grade and floating rate debt have seen the highest inflows in fixed income this year, with $20.2 billion and $51.4 billion into each sector respectively.

To read the whole Purple Book, click here.

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