Potential demand for high-quality, long-duration bonds could amount to $600 billion in total over the next few years due to both a shift to more fixed-income allocations and a shift within fixed income to more of a long-duration, derisking strategy, Michael A. Moran, pension strategist, Goldman Sachs Asset Management Inc., New York, said in an interview.
As interest rates rise, more plans will move farther on their derisking glidepaths to raise fixed-income allocations to stabilize funded levels, said Mr. Moran and Michael A. Archer, Philadelphia-based senior consulting actuary, Willis Towers Watson PLC.
“The timing of the move is highly dependent on the path of funded status and interest rates,” Mr. Moran said in a follow-up e-mail.
“If we assume a slow climb in interest rates combined with stronger contribution activity, that shift perhaps could occur over the next four years which, if we amortized that $600 billion shift equally, would result in annual demand of $150 billion per year,” Mr. Moran said.
Mr. Moran expressed concern about whether the market will have enough supply of such debt for the coming demand. A rise in interest rates will make debt issuance less attractive to corporations, lowering supply, Mr. Moran said.
Total investment-grade corporate bond issuance last year was $1.15 trillion of all maturities, including $234 billion in 30-year bonds. Those numbers were up from 2014, with $1 trillion of investment-grade corporate bonds of all maturities, including $194 billion in 30-year bonds. This year through the end of April, $402 billion in investment-grade corporate bonds have been issued in all maturities, including $55 billion in 30-year bonds, according to Mr. Moran, who forecasts $1.15 trillion of all maturities will again be issued for all of this year.
“The average 30-year issuance (each year) over the last 10 years (through the end of 2015) was $148 million,” Mr. Moran said in a follow-up e-mail. “So the last few years have been a very robust period for issuance.”
“There probably is not enough long bond capacity” to satisfy pension plan demand, Mr. Archer said in an interview. As a result, there probably will be a lot of portfolios with a mix of Treasury and corporate issues along with alternative debt, such as from insurance company private placements.
Many sponsors are preparing to raise fixed-income allocations as funded status improves. “They are just having difficulty doing it (now) in the current environment because of low interest rates and low funded status,” Mr. Moran said.