his article appeared originally on institutionalinvestor.com on 8 July 2013.

Amid the rush to the exits by investors fearful of a so-called bond bubble, one group has been buying, sometimes aggressively. Who are these contrarians? What do they see that the broader public doesn’t?

Answer: They are managers of America’s corporate pension funds and insurance companies. They are buying long bonds. And their motivations offer lessons to the stampede of sellers.

Understanding their actions requires revisiting the last decade and a half of funding in the pension universe. From a top of 128% in 1999, the aggregate funding ratio of pension plans of companies in the S&P 500 fell to 81.6% in 2002, slowly climbing to crest again at just over 100% in 2007, only to plummet in 2008. Since 2009 the ratio has bounced around 80% – despite a more than doubling of U.S. equity prices. Last year, the aggregate funding ratio fell to 78%, marking the nadir of the last two decades. Would you blame any plan sponsor for reaching for the Dramamine?

As keen observers know, funding is not just about the value of assets, but also liabilities. Pensions have very long-dated liabilities. And the decline in rates that fueled the great bond bull market sent liabilities skyrocketing for plan sponsors, and similarly for their cousins on the life insurance side, because these investors use market rates to discount their future liabilities. 

Driven by a combination of George Bush’s famously botched aphorism, “Fool me once, shame on … shame on you. Fool me … You can’t get fooled again!” plus accounting and regulatory changes in 2006 that brought heightened focus to funding, pension plan sponsors began to drastically change the ways they managed plan assets.

Since 2009, the dominant thematic strategic change among consultants and plan sponsors has been to adopt de-risking glide paths. The idea: As plan funding (gradually) improves, sell risk assets and buy hedging assets – predominantly long investment grade corporate bonds. Funding could improve for one of three reasons:

  1. Risk assets (e.g., equities) go up.
  2. Discount rates rise and liabilities go down.
  3. Sponsors put more money into plans.

Given the funding rules in place, even with the temporary funding holidays allowed under MAP-21 legislation last year, it is a certainty that funding ratios will improve. The question has been when. The answer has come – now. 

Given the rise in risk assets since the beginning of the year, followed by the recent bond sell off – which has seen the 10-year Treasury yield back up nearly 100 basis points since its recent low of 1.63% on May 1 – plan funding has had a decided uptick. Milliman estimates aggregate funding is up by 6 points year-to-date through May, and we’d estimate a further 2 to 3 percentage point increase in June. Plan sponsors are cruising through de-risking triggers and moving money from equities into long corporate bonds. A few large plans with better funding positions at year-end are either back to full funding or just on the doorstep. Buying of long credit has been strong throughout the year and has increased noticeably in the past few weeks. We anticipate it will continue through the balance of the summer and into the fall. These plan sponsors are happy to get off the roller coaster.

Life insurers find themselves in the same boat. They too have books of liabilities that are very long-dated and face a persistent asset-liability mismatch. Liquid bonds may extend to 30 years, but projected annuity cash flows can extend 40, 50 or more years into the future. These liabilities only get longer as we live longer.

The graphs in Figure 1 show two interesting phenomena since the beginning of May. First, note that as the benchmark 10-year yield rose dramatically, the yield curve between 10 years and 30 years flattened materially, consistent with some support from long bond buyers. Also note that in a period where both equities and fixed income sold off broadly, life insurer stock prices rose more than 10%.  

Clearly, rising rates have been good for pensions and life insurers.

What about the broader public? Pensions and life insurers have explicit long-dated liabilities. In truth, though, just about everyone saving for retirement has implicit long-dated liabilities. Higher rates ultimately may be good for investors worried about how much they need to save for retirement.

The transition period may be painful, but this current cloud does have a silver lining.

The Author

James Moore


View Profile

Latest Insights


PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The Italy branch is additionally regulated by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Deutschland GmbH Italian Branch (Company No. 10005170963), PIMCO Deutschland GmbH Spanish Branch (N.I.F. W2765338E) and PIMCO Deutschland GmbH Swedish Branch (SCRO Reg. No. 516410-9190) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch, Spanish Branch and Swedish Branch are additionally supervised by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act, the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and  203  to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008 and the Swedish Financial Supervisory Authority (Finansinspektionen) in accordance with Chapter 25 Sections 12-14 of the Swedish Securities Markets Act, respectively. The services provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-, Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 512 49 10. The services provided by PIMCO (Schweiz) GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862 (PIMCO Australia). This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd (Toranomon Towers Office 18F, 4-1-28, Toranomon, Minato-ku, Tokyo, Japan 105-0001) Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association and The Investment Trusts Association, Japan. Investment management products and services offered by PIMCO Japan Ltd are offered only to persons within its respective jurisdiction, and are not available to persons where provision of such products or services is unauthorized. Valuations of assets will fluctuate based upon prices of securities and values of derivative transactions in the portfolio, market conditions, interest rates and credit risk, among others. Investments in foreign currency denominated assets will be affected by foreign exchange rates. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is managed and operated independently. The reference number of business license of the company approved by the competent authority is (107) FSC SICE Reg. No.001. 40F., No.68, Sec. 5, Zhongxiao E. Rd., Xinyi Dist., Taipei City 110, Taiwan (R.O.C.), Tel: +886 (02) 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world.

Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks, including market, interest rate, issuer, credit and inflation risk.

This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. This material is published by Institutional Investor. Date of original publication 8 July 2013.