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Markets are fixated on the tit-for-tat trade war between China and the United States. But the U.S. bond market might start grabbing new attention.
The yield on the 10-year U.S. Treasury note is back up at 3.23 percent, hitting fresh multi-year highs. Bond yields – the amount they pay out to investors who hold them – move inversely to prices. So when bond prices decline, as they have recently, their yields edge higher.
As recently as last month, technical strategists were pointing out that a firm break of the 10-year yield through 3.05 percent could set yields on a higher trajectory in the long term. But there's reason to believe that may stall, even with the U.S. Federal Reserve widely expected to raise rates.
Pension funds, especially in the United States, may be poised to swoop into the bond market — especially in a world where one quarter of all interest rates are negative.
"The bond market could see a bid emerge from the private pension fund community, that currently stands around $3 trillion universally in assets under management," according to a September note from J.P. Morgan Research analyst Nikolaos Panigirtzoglou.
Pension funds' "funded status" – the percentage of funds' assets over their liabilities – has improved substantially over the course of 2018. Pension funds generally hold portfolios of both stocks and bonds. This year, the stocks held by many pension funds have gained value along with the wider market.
Commodity Futures Trading Commission showed an increase of net "short" positions by traders, indicating they believe that yields could continue to move higher.
Bonds comprise about 45 percent of the holdings of U.S. pension funds, according to J.P. Morgan, compared with about 60 percent in Europe and Japan. Hypothetically, if U.S. pension funds were to increase to European levels, that would imply about $450 billion moving into U.S bond markets.
by Taboola
by Taboola
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