U.S. companies are funneling extra money into their pension
take advantage of temporary tax savings, moves that are helping suppress
yields on long-term Treasurys.
S&P 500 companies are contributing to pension plans
this year at a pace expected to nearly match 2017’s level, which at $63 billion
was the most since 2003, according to Goldman Sachs Asset Management. Last
year’s contributions were spurred in part by companies anticipating changes in
the U.S. tax-code overhaul.
That and continued contributions this year have been a boon
for the Treasury market because pension funds tend to invest in long-dated
bonds to match their long-term liabilities. The yield on the 30-year bond has
been falling recently, closing at 2.953%% on Thursday, down from a recent peak
of 3.245% in mid-May.
Analysts are pinning the drop in yields—which happens as
prices rise—partly on demand from pension funds. Long-term rates have remained
low and U.S. inflation has picked up this year. Inflation poses a risk to
bonds, and especially longer-dated ones, because it erodes the purchasing power
of fixed-interest and principal payments.
Counting ContributionsU.S. companies made big contributions
to their pension funds last year and areexpected to do so again this
year.S&P 500 pension contributionsSource: Goldman Sachs Asset
ManagementNote: 2018 figure is a full-year estimate
Long-term yields are “very low because people are still
putting money into Treasurys,” said Torsten Slok, an economist at Deutsche Bank .The difference between
yields on 30- and 10-year Treasury debt has shrunk to about 0.13 percentage
point this week from about 0.33 percentage point at the start of this year.
Voluntary contributions to pension funds, which already
were brisk last year, have taken off recently thanks to the passage of the tax
overhaul. This introduced a window for companies with underfunded plans to make
additional contributions and garner a tax benefit, analysts say.
Firms that contribute through mid-September of this year
can receive deductions based on the old 35% corporate tax rate, rather than the
new 21% rate. A company that contributes $1 million to an underfunded pension
plan could have $350,000 in tax savings before the deadline, but would have savings
of just $210,000 after September.
Those making discretionary pension contributions
include Verizon Communications Inc., which
added $1 billion to its pension plan in the first three months of the year, a
large enough sum that the telecom giant won’t have to make mandatory
contributions for eight years, the company said in April. A Verizon spokesman
said the tax benefit was a factor in the contribution.
said in April that it made a discretionary contribution of $1.4 billion. Deere & Co. and United Parcel Service Inc. both
have cited the tax law as the reason for increasing their voluntary pension
Under the new tax law approved by Congress, the standard
deduction is going up and the personal exemption is going away. But these
changes won't be visible until your 2019 returns. WSJ's Richard Rubin explains
the recipe behind the changes that are coming to your tax bill. (Originally
Published February 15, 2018)
“You will probably see more do it over the next few
months,” said Michael Moran, a pension strategist for Goldman Sachs Asset
One sign that pensions have a lot of fresh money to pour
into U.S. government debt is strong demand for what are called stripped
long-term Treasurys. These securities are created when bond dealers cleave a
bond into separate interest-only and principal-only instruments.
Pension funds often purchase the principal-only
instruments, which are akin to zero-coupon bonds. The funds purchase the debt
at a deep discount, forgo regular interest payments and instead receive the
debt’s full face value at maturity. This gives pension plans funds when a
liability is coming due and provides them with more financial flexibility in
The amount of stripped long-term Treasury bonds rose 9.4%
in the first five months of 2018, putting them on track to grow at more than
twice the pace of the previous year, according to data from BMO Capital
Markets. That would mark the fastest growth since 2010.
Stripping SoarsPension funds and other investors who have
long-term liabilities to pay for have ledto a surge in demand for stripped
Treasurys.Stripped Treasury long-term bondsSource: U.S. Treasury
Pension-fund purchases of both principal-only stripped
long-term Treasurys and Treasury debt have played a key role in keeping
long-term yields low, analysts said. And pension funds’ debt appetite may grow
in coming months as companies that have been waiting for higher rates make
their move before the tax window closes, said Richard Sega, chief investment
officer at Conning, who manages money for insurance companies and pension
After that, though, pension funds could have a reduced
appetite for longer-dated Treasurys. Combined with a quicker pace of
government-debt issuance due to growing deficits, this could help to push
yields higher, said Deutsche Bank’s Mr. Slok.
Demographic shifts toward an older workforce, though, could
lead companies to continue increasing pension-fund contributions. Meanwhile,
companies and governments in developed economies outside the U.S. will face
similar demographic challenges, which also would lead to more Treasury buying,
Mr. Sega said. “This is a long-term global trend,” he said.
here for the original article from The Wall Street Journal.