NEW YORK — The expected reissuance of the 30-year U.S. Treasury bond won't be enough to help cash-strapped corporate pension plans match assets to liabilities, but it could spur corporations to issue longer-duration securities that pension executives want.
Matching assets to liabilities is a move that many ERISA funds have been examining — especially with the prospect of mark-to-market accounting becoming the norm — as longer-duration securities enable corporations to ensure pension obligation benefit payments over a longer period of time on their balance sheets.
The Treasury will announce on Aug. 3 whether it will issue the 30-year bond for the first time since October 2001. Most observers expect the Treasury to issue $20 billion to $30 billion in bonds next February.
According to a May 6 report from the global analytic and thematic research group of Merrill Lynch & Co., New York, the re-issuance is a "fait accompli. … With budget deficits on the order of $300 billion to $400 billion, the government needs money."
"It is not the potential of the Treasury issuing the 30-year maturity again that will necessarily spur long-duration corporate supply," said Jim Esposito, head of the sell-side investment-grade syndicate desk at Goldman Sachs & Co., New York. "Rather, corporations might be driven by a similar thought process to Treasury: the yield curve is extremely flat and 30-year yields are at 25-year lows. The economics of issuing long-duration bonds are about as good as they have ever looked."
Thomas Girard, co-director of fixed income at Weiss, Peck & Greer, New York, a unit of Robeco Investment Management, agreed. "The reissuance is good because you now have a liquid benchmark security on the long end of the curve," he said.
"The 30-year Treasury issuance could also encourage other parts of the market to increase their issuances of longer-duration bonds. But the bottom line is, there will now be a liquid benchmark out there that should hopefully improve liquidity on the long end of the curve."
But another sell-side banker — Therese Esperdy, managing director of investment-grade debt capital markets at J.P. Morgan Chase & Co., New York — disagreed. "I don't think the reissuance of the 30-year Treasury will have a direct impact on the decisions of chief financial officers to issue long-duration bonds," said Ms. Esperdy. "They are more concerned with the absolute coupon rates, the impact they would have on earnings per share, etc. I know some people are saying that, I guess I'm more skeptical," she said.
"It's great that they are bringing the 30-year Treasury back," said James Kauffman, senior vice president and head of fixed income at ING Investment Management, Atlanta. "There's no doubt they were going to bring it back, but it's just not enough to help corporations in asset-liability matching. The amount the Treasury is expected to issue just pales in comparison to the total underfunded amount that corporate pension plans face."
Mr. Girard of Weiss, Peck & Greer said no one should "expect what the Treasury will issue will solve the (underfunding) problem."
The nation's 1,108 most underfunded corporate plans have liabilities of more than $350 million, according to Bradley Belt, executive director of the Pension Benefit Guaranty Corp., Washington.
"There has been a lot of growing demand for securities on the long end of the curve. Certainly, there's not a lot of supply; there's just not very much on the long end that seems to match pension liabilities. The bottom line is that we need a lot more than the Treasury to issue long bonds. We need corporations and agencies to do so as well. But the reissuance (of the 30-year Treasury) will be good for market equilibrium," said Peter Wilson, managing director, senior fixed-income portfolio manager and strategist at Barclays Global Investors, San Francisco.
Colin Robertson, managing director of fixed income at Northern Trust Global Investments, Chicago, said plan sponsors are not yet seeking asset-liability matching tools, but that could change as the underfunding crisis gets worse.
"We maybe have gotten some inquiries about asset-liability matching, but we haven't had any dramatic or huge moves made by clients at all," Mr. Robertson said. Meeting actuarial assumptions is higher on corporate pension plans' priority list, he added.
Mr. Robertson also did not believe that the reissue of the 30-year will spur corporations to issue long-duration bonds. "I'm not as confident that corporates will jump on the bandwagon," he said. "
Increasing the duration of pension plans' bond portfolios to match liabilities is easier said than done, said Peter Chiappinelli, a senior strategic relationship analyst at Putnam Investments, Boston.
"The problem is that the long end of the bond market has slim pickings — exacerbated by the Treasury's decision to stop issuing the 30-year bond a few years back," he said. "The liquidity and availability of long-duration bonds is thin. Any talk of reissuing long-duration bonds, then, would be good for any plan looking to extend their portfolio's duration."