US Public Pensions Stock Up on Treasury Bonds

(September 28, 2012) – US Treasury bonds have never looked so good, even with real interest rates scraping zero. 

The US Census Bureau has just released second quarter 2012 data on the 100 largest public pension funds, which comprise nearly 90% of the nation’s total public pension assets. One of the survey’s key findings: funds are, in aggregate, allocating the largest portion of their assets to federal government securities since the third quarter of 2004. 

Taken together, the 100 biggest public funds were holding 9% of their assets in US federal fixed income, which the census defines as US Treasury bonds, notes, Federal Financing Bank securities, and other federal agency securities. In a single year, allocations jumped by nearly a third, up from 6.6% in 2011’s second quarter. 

Following the financial crisis, allocations to the asset class—a relative safe haven amid global volatility—began to rise gradually from a 34-year low of 6% in the second quarter of 2008. Then, just after the close of the 2011 fiscal year, public pensions began dumping assets into Treasury bonds. In a single quarter, starting June 30 2011, chief investment officers at the nation’s largest public pensions reallocated $45.8 billion into federal securities. In the following quarter, 2012’s second, public funds sunk in nearly $20 billion more. 

For many, it was a wise decision. The nation’s largest public pension, California’s employee retirement system, gave its $38.3 billion US fixed-income portfolio a glowing review in the latest (Q2 2012) quarterly performance report: “The treasuries portfolio reversed prior quarter’s decline and posted a strong gain of 7.3% during the second quarter, after weak economic growth data in the US and concern over Greece’s potential departure from the Euro between April and May pushed investors back towards the safety of US government bonds. Treasury bonds outperformed all other fixed income portfolios as well as the Income policy benchmark.”  

It’s not just American CIOs who are sweet on the treasury bonds. Among institutional investors globally, US debt was the most favored of any sector in 2011, according to data monitor EPFR. Meanwhile, annual outflows from European bond funds broke the previous record set in 2008, with over $20 billion in assets being pulled by owners.