Corporate pension plans push demand for Treasury STRIPS
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Comvest closes credit fund at $1.3 billion
      Wall Street signage in the Financial District of New York
      Assets in alternative investments set record in 2020
      Non-profit questions dividend recapitalization play at Ares portfolio company
      Walker & Dunlop appoints managing director
    • Philip Pearson
      Hymans Robertson chooses head of LGPS investment
      Daniel Celeghin
      Indefi hires New York-based managing partner
      Hub International continues buying spree with IBG acquisition
      Callan brings on 2 executives
    • Pandemic takes toll on real estate fundraising in 2020
      Swedish flags fly from a tourist souvenir shop in Gamla Stan in Stockholm on March 26, 2020
      Systematic hedge fund IPM to shutter after ‘lackluster’ performance, outflows
      Insurers taking on more portfolio risk as pandemic ebbs – survey
      American flags outside the New York Stock Exchange
      Stock shorts collapse as no hedge fund wants ‘head ripped off’
    • Pie chart showing different categories of asset allocation with a calculator
      Record keepers answer the call for adviser managed accounts
      Comfortable retirement still on track for most Americans despite pandemic – survey
      Pentegra joins with EPIC to offer 3(16) fiduciary services
      Joseph Healy
      Smaller DC plans place greater focus on improving financial wellness efforts
    • CDPQ boosts low-carbon assets to 10% of portfolio
      White House sets ambitious goal for greenhouse gas emissions by 2030
      Yale rolls out 5 principles for endowment on fossil-fuel investing
      Pension funds hear from beneficiaries on ESG – report
    • Girls Who Invest
      MetLife plans 3 internships for Girls Who Invest scholars
      Model home
      Resmark sees niche in buying, leasing model homes
      Riscura stories
      Dystopian tales explore altered retirement reality
      Joel Holsinger
      Ares wants to do good – and profit – with fund
    • The New York Stock Exchange reflected in a window of Federal Hall
      Infinity Q Capital to liquidate hedge fund due to mispricing
      Swedish flags fly from a tourist souvenir shop in Gamla Stan in Stockholm on March 26, 2020
      Systematic hedge fund IPM to shutter after ‘lackluster’ performance, outflows
      Karen Karniol-Tambour
      Bridgewater appoints 2 co-CIOs to oversee new sustainable investing group
      Hedge funds post best first-quarter return since 2000
    • The seal of the Securities and Exchanges Commission at the agency's headquarters in Washington
      SEC said to review fund disclosure rules after Archegos rout
      Trillium hires 2 to lead expansion into U.K.
      CDPQ boosts low-carbon assets to 10% of portfolio
      White House sets ambitious goal for greenhouse gas emissions by 2030
    • Blackstone AUM climbs 4.9% in latest quarter
      Trillium hires 2 to lead expansion into U.K.
      Credit Suisse logo
      Credit Suisse expects further hit from Archegos scandal
      Bill Hench
      First Eagle gives wing to small-cap equity team with liftout from Royce
    • Denmark’s ATP plans bid to build North Sea energy island
      PennPSERS taps Verus for oversight consulting services amid probe
      State pension plan funding advances in first quarter – Wilshire
      Sacramento County Employees rebalances equity, fixed-income portfolios
    • Trillium hires 2 to lead expansion into U.K.
      Walker & Dunlop appoints managing director
      Bill Hench
      First Eagle gives wing to small-cap equity team with liftout from Royce
      Philip Pearson
      Hymans Robertson chooses head of LGPS investment
    • EQT closes latest private equity fund at $18.7 billion
      U.S. $100 bills
      AlpInvest raises $3.5 billion for latest co-investment fund
      ILPA members making diversity a bigger priority in private equity
      European private equity deal value, volume hit records for first quarter
    • Pandemic takes toll on real estate fundraising in 2020
      J. Tomlinson Hill
      Two Sigma takes quant expertise into real estate investing
      BentallGreenOak closes latest European fund at $2.3 billion
      Cohen & Steers adds team for new private real estate business
    • Andy Schreiner
      New PEPs targeting firms without retirement plans
      Jackie Walorski
      Contribution catch-up for caregivers gaining favor
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Neal and Brady
      Retirement security could be only issue both sides accept
    • A coin representing Bitcoin cryptocurrency in the U.K.
      Cryptocurrency and digital assets
      Corporate pension contributions
      Eddy Awards 2021
      COVID-19: One year in
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Orange County Employees commits $55 million to 2 buyout funds
      Alexandria, Va., scouting for DB and DC plan consultants
      Gresham, Ore., hunting for 457 plan consultant
      San Joaquin County casts net for core bond managers
    • Orange County Employees commits $55 million to 2 buyout funds
      Alexandria, Va., scouting for DB and DC plan consultants
      Gresham, Ore., hunting for 457 plan consultant
      San Joaquin County casts net for core bond managers
    • Emerging Market Debt Manager Services
      Real Assets Consultant
      Passive Investment Management Services
      Active Extended Global Credit Manager Search
    • High-yield spreads narrow, default rates drop
      Private real estate funds continue rebound
      Managed account adoption stalls in 2020
      U.S. bonds have worst quarterly return since 1981
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Marcie Frost
      CalPERS: Urgency underscores all areas of providing retirement security
      BPTW cartoon
      P&I’s Best Places to Work marking a milestone
      CalPERS cartoon
      Urgency underscores CalPERS' search for a CIO
      Multiemployer plans cartoon
      Money — but no fixes — for multiemployer plans
    • Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
      COVID-19 Makes LP Portfolio Management More Important Than Ever
      China: the outlook is bright for longer-term investors
      Finding Differentiation in Securitized Assets
    • Robert Pozen
      Commentary: Maintaining corporate culture in an era of remote work
      John Bakarat
      Commentary: COVID-19 and real estate debt – where investors should be looking
      Jake Remley
      Commentary: Inflation expectations vs. reality in the bond market
      Greg Shea and Steven Kindred
      Commentary: The solution for yield-seeking allocators may be hiding in plain sight
    • Marcie Frost
      CalPERS: Urgency underscores all areas of providing retirement security
      Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
    • P&I Content Solutions
      Research for Institutional Money Management
      P&I Content Solutions
      Top questions for institutional investors
      Sponsored Content By Newton Investment Management
      Growth and Innovation in Emerging Markets
      P&I Content Solutions
      In Challenging Markets, Systematic Global Macro Strategies Could Hold Opportunity
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • Invesco logo shown on the floor of the New York Stock Exchange
      watch video
      1:28
      Invesco’s bid for performance gains
      watch video
      1:23
      The passive fixed-income glut
      watch video
      1:38
      Is it time for DC plans to embrace private equity?
      watch video
      5:39
      The coronavirus pandemic: One year later
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Investing in infrastructure at the right price
      Time for Action: Shifting Pension Dynamics from a Macro and Regulatory Relief Perspective
      Understanding the PEP Evolution
    • POLL: Cryptocurrency investing
      POLL: The Biden infrastructure plan
      POLL: Retirement income solutions
      POLL: Working after the pandemic
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • High-yield spreads narrow, default rates drop
      By the Numbers for April 2021
      Graphic: The state of DC plans
  • Events
    • Conferences
    • Webinars
    • DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
      Retirement Income Conference
    • New Outlook on Income: A Framework for Evaluating DC Retirement Income Solutions
      Investing in infrastructure at the right price
      Time for Action: Shifting Pension Dynamics from a Macro and Regulatory Relief Perspective
      Understanding the PEP Evolution
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. DEFINED BENEFIT
March 30, 2017 01:00 AM

Corporate pension plans push demand for Treasury STRIPS

But public funds are looking elsewhere

Paulina Pielichata
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Demand for U.S. Treasury STRIPS is soaring, fueled by rising interest rates and U.S. pension plans' desire for asset-liability matching, industry sources said.

    Treasury STRIPS jumped to a 17-year high at the end of 2016, reaching $233 billion compared with $215 billion a year earlier, according to Bloomberg data provided by Bank of America Merrill Lynch. By Feb. 28, such STRIPS available in the market grew to $241 billion.

    With interest rates going up, U.S.-based corporate defined benefit pension funds seeking duration have been particularly enthusiastic about STRIPS. For pension funds, they are a natural fit — a strategy that is used to secure cash flow for the future payment of liabilities and protect against interest rates risk, sources said.

    STRIPS don't disappoint on the performance front, either. The Barclays U.S. 20+ years STRIPS index annual return was 9.9% during the three years ended Feb. 28, compared with 2.6% achieved by Barclays U.S. Aggregate Fixed Income index, according to Bloomberg data.

    “The buyers of 30-year U.S. Treasury STRIPS have increasingly been domestic U.S. pension funds,” said James McAlevey, senior portfolio manager at Aviva Investors in London.

    Sources expect demand to continue, if not grow, as the Federal Reserve gears up for more hikes this year, following the most recent one on March 15 that pushed the federal funds rate to a 0.75% to 1% range.

    Pension fund consultants agree there will be more demand coming from corporate plans.

    “STRIPS are the most capital efficient way to obtain interest rate exposure short of accessing the derivatives market,” said David Murad, managing director at Rocaton Investment Advisors LLC in Norwalk, Conn.

    Mr. Murad declined to name clients that are pursuing the strategy.

    But rate-hike anticipation has not been the sole factor in demand for STRIPS, which remove, or strip out, the coupon from the principal.

    Higher premiums from the Pension Benefit Guaranty Corp. also “motivated … pension plans to buy long-dated STRIPS,” said Shyam Rajan, Bank of America Merrill Lynch's head of U.S. rates strategy in New York. Higher PBGC premiums pushed pension plans to adopt glide-path derisking strategies. As funded ratios improve due to higher interest rates, pension funds tend to buy more STRIPS.

    “As pension funds embarked on derisking and shifted away from equity to cash bonds, interest in long-dated STRIPS has continued to climb,” Mr. Rajan said.

    Still, while analysts proclaim the demand for STRIPS from corporate defined benefit plans is here to stay, some public plans are spotting value elsewhere.

    The $63.2 billion Massachusetts Pension Reserves Investment Management Board, Boston, decided to move away from STRIPS in February.

    “PRIM invested in STRIPS to reduce portfolio risk given their historically negative correlation with equity markets, but now we're exploring new ways to obtain that insurance against equity risk,” said spokesman Eric Convey “We bought STRIPS several years ago and they did extremely well for us to offset equity risk, but now we are reducing our allocation to 2% of the fund from 5%.”

    PRIM's BlackRock STRIPS portfolio returned 30.06% for the fiscal year ended June 30, 2016. As of that date, the STRIPS holdings by the Massachusetts Pension Reserves Investment Trust were valued at $3.3 billion.

    Corporate plan sponsors are investing in STRIPS to match liabilities of their pension funds, while public funds might have moved away from them in order to reduce duration by investing in Treasury inflation-protected securities, according to Phillip Nelson, principal and director of asset allocation at NEPC LLC in Boston.

    Kevin Moose, senior portfolio manager and head of rates at the $186.2 billion Florida State Board of Administration in Tallahassee, said in an email: “Any core fixed-income strategic duration extension beyond the 10-year tenor would likely not be expressed using U.S. Treasury STRIPS, but more liquid instruments such as the on-the-run 30-year U.S. Treasury bond or ultralong bond futures.”

    But although public pension funds might be going for other instruments, STRIPS offer a chance to build a more diversified portfolio in regard to risk, said Daniel Morris, head of U.S. portfolio solutions at Schroders in New York. “Holding STRIPS may allow a pension fund to build a more flexible and diversified portfolio including a wider opportunity set of bonds to incorporate, such as BBB-rated corporate bonds.”

    One hindrance of long-dated STRIPS is the fact that initial and ongoing transaction costs for holding a STRIPS portfolio are significant relative to a typical long-term Treasury portfolio. “We would expect a long STRIPS portfolio to incur initial transaction costs in the 15 to 30 basis points range and ongoing costs in the five to 10 basis points range,” Mr. Murad said.

    While domestic demand for STRIPS on the long end of the curve has grown, non-U.S. investors aren't as enamored because of costs.

    One of the drawbacks for European investors is the high currency hedging cost they have to bear by purchasing U.S. securities. Sources said European investors are instead more likely to buy the debt of peripheral European Union countries, which eliminates foreign exchange costs.

    Mr. McAlevey also saw Japanese investors take a step back from the U.S. Treasury market in recent quarters. “Japanese investors started scaling back their purchases in the third quarter last year as domestic yields normalized and they found domestic yields more attractive,” he said.

    Related Articles
    U.S. corporate pension funding drops in second quarter
    Corporate pension funding levels stable in August — 2 reports
    Multiemployer advocacy group names new executive director
    Credit easing, regulation put plans on critical list
    PBGC girds for pending union plan catastrophe
    U.S. corporate pension funding rises to 84% at end of first quarter — 2 reports
    Corporate pension funding inches up in March — 2 reports
    Treasuries rally after U.S. drops huge non-nuclear bomb on IS
    Playing the long game: The case for ultralong Treasuries
    Recommended for You
    R.I. treasurer seeks transparency laws for church plans
    R.I. treasurer seeks transparency laws for church plans
    Public pension funds adopt cost-sharing mechanisms to stem volatility
    Public pension funds adopt cost-sharing mechanisms to stem volatility
    Avery Dennison to terminate U.S. pension plan
    Avery Dennison to terminate U.S. pension plan
    Top questions for institutional investors
    Sponsored Content: Top questions for institutional investors
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Bipsync Client Stories: RMS in Action at Pensions and Superannuation Funds
    COVID-19 Makes LP Portfolio Management More Important Than Ever
    China: the outlook is bright for longer-term investors
    Finding Differentiation in Securitized Assets
    Green and sustainable bonds in emerging markets
    Portfolio Protection: One Size Fits None
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    April 5, 2021 Page One

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center