Rising Treasury rates are sparking more interest in liability-driven investment strategies, but those rates might have to go up even more before it's full throttle for money managers.
LDI implementation slowed in the spring and summer because record low interest rates made buying long-duration bonds, the key instrument in LDI strategies, untenable to some institutional investors, said Bob Collie, Seattle-based chief research strategist for Russell Investments' Americas institutional business, in an interview.
“A sharp rise in rates could certainly change things,” he said. ”If interest rates settle down at a higher level, that may well trigger reconsideration by some plans; liabilities would be lower and funded status higher.”
Rates on the 10-year Treasury note rose to 2.15% on Nov. 10, up from an all-time low of 1.359% on July 8, Bloomberg statistics show.
LDI took off after federal pension accounting changes in 2006, resulting in hundreds of billions of inflows into the strategy in the following years. Pensions & Investments' Research Center data show there was at least $2.1 trillion in worldwide LDI assets of which $519 billion was from U.S. institutional tax-exempt investors as of Dec. 31, 2015.
Under LDI, corporate pension plans replace risk assets such as stocks with long-duration bonds with the aim of gaining a more precise match of assets to liabilities, both current obligations and future accruals. The objective is to reduce funded status volatility. As pension plans become better funded, risk-seeking assets gradually are replaced by assets that more closely mimic the profile of the plan's liabilities.
Several money managers said they have seen a rebound in LDI investing in the past few months as Treasury rates have risen. More corporate pension plans are embracing LDI and plans that already have committed to LDI are restarting their move down a multiyear glidepath that reduces equities and replaces the risk assets with long-duration fixed-income securities.
“When interest rates dropped in the second quarter, some corporate pension plans slowed up on the pace,” said Jess B. Yawitz, chairman and CEO of NISA Investment Advisors LLC in St. Louis.
That is now changed. “The level of activity in new mandates and finals presentations is significantly higher than the summer,” Mr. Yawitz said. “We never have been busier.”
Mr. Yawitz would not disclose net inflows, but said his firm had assets under management of $143 billion on Sept. 30, and LDI strategies totaled $110 billion. That is up from $83 billion invested in LDI strategies at the beginning of 2013.
Mr. Yawitz said his firm had 176 clients, of which 143 were in some type of LDI strategy. He said the clients are in different phases of LDI implementation, some at the beginning of the multiyear process, some in the middle, and some at the end.