Updated February 27 at 11:49am

Great rotation seen muted by pension-fund demand

A shift by household investors from bonds into equities that Bank of America Corp. dubbed the great rotation is being muted as pension funds and insurers boost fixed-income assets to match future obligations. More

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Great rotation seen muted by pension-fund demand

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NEW YORK - A shift by household investors from bonds into equities that Bank of America Corp. dubbed the great rotation is being muted as pension funds and insurers boost fixed-income assets to match future obligations.

U.S. companies with the largest defined-benefit pensions increased allocations into fixed-income to 41.3 percent from 36 percent since 2010, putting a greater share into the market than into equities, according to JPMorgan Chase & Co. analysts and data from actuarial and consulting firm Milliman. Life insurers are replacing maturing structured securities with corporate bonds. And sovereign-wealth funds with $4.3 trillion of assets are investing 90 percent of it into debt, the analysts said.

“If there were this rotation from individuals from bonds into stocks, and it created higher yields and stronger stock performance, it would quickly find a match on the other side of the trade from the institutional pension community,” money manager Jeffrey Gundlach, whose $33.9 billion DoubleLine Total Return Bond Fund had its biggest net withdrawal in September, said in a telephone interview. “I don’t think it’s some sort of runaway condition.”

The demand from institutional buyers is mitigating $166 billion of withdrawals from bond funds earlier this year amid mounting concern the Federal Reserve was poised to start scaling back stimulus measures that have pumped more than $3 trillion into the financial system. Bank of America strategists in January called a retreat from corporate bonds by mutual-fund investors the “biggest risk” to investment-grade debt.

Aging boomers

Yields on dollar-denominated, investment-grade debt, which fell to a record low of 2.65 percent on May 2, have since risen to 3.33 percent, according to the Bank of America Merrill U.S. Corporate Index. The higher rates have attracted institutional investors to add to their positions, JPMorgan analysts led by Joyce Chang, the New York-based global head of fixed-income research, wrote in a report last week.

equities, fixed income, corporate bonds, federal reserve, quantitative easing, tapering, baby boomers
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