This week will see an unusually busy month-end rebalancing among U.S. pension funds after the electric rally in stocks in recent weeks forces some to shift more than usual into fixed income, according to Wells Fargo & Co.
Bonds will likely get a $24 billion boost, while stocks will see a $26 billion outflow by the end of the month, Wells Fargo strategists led by Boris Rjavinski wrote Monday in a report. Pension rebalancing flows tend to be heftier at the ends of quarters, as not all funds update monthly, the strategists said. But with stocks running laps around bonds, managers may not be prefer to wait that long.
"We expect many funds that would normally wait until quarter-end to join the more frequent 'monthly rebalancers' in the next few days," the strategists wrote. "This would be a significant-size asset reallocation in historical context, and certainly one of the largest non-quarter-end pension portfolio adjustments."
Most of the equity outflows are projected to be from domestic large-cap and small-cap portfolios, while global developed stocks may see modest selling and emerging markets hardly any at all, the Wells Fargo team wrote. Initial inflows into fixed income will likely be via liquid Treasury futures contracts, they predicted.
"Sizable pension flows from equities to bonds could amplify other market drivers this week," especially if anything ranging from the U.S.-North Korea summit to Federal Reserve Chairman Jerome Powell's testimony before Congress triggers a risk-off move, the strategists said.