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Pension demand for ultra-long bonds is overstated -Credit Suisse
April 26, 2017 / 8:21 PM / 5 months ago

Pension demand for ultra-long bonds is overstated -Credit Suisse

NEW YORK, April 26 (Reuters) - The appetite of U.S. pension funds for a U.S. government bond that matures as far as out as 100 years may be far less than what some analysts had estimated, Credit Suisse analysts said on Wednesday.

“On the whole, it isn’t clear to us that there’s enough permanent sizable demand that will allow ultra-long Treasuries to be auctioned on a regular basis,” they wrote.

Growing demand from private and public retirement plans is seen by many analysts as a key factor that could support regular sales of an ultra-long Treasury bond.

British, Canadian, Japanese and French pensions have been large holders of their own countries’ ultra-long government debt.

U.S. pension funds have a combined “latent” demand for long-dated bonds, worth more than $3 trillion, so they can earn enough interest income to meet future payouts to retirees, according to Credit Suisse strategists Praveen Korapaty, William Marshall and Jonathan Cohn.

While they face a large investment gap, U.S. pension funds are unlikely to fill all of it with U.S. government securities. They may add more stocks and long-dated corporate bonds to achieve their payout target, rather than relying on ultra-long Treasuries, the Credit Suisse analysts said.

“As a result, we don’t expect that sizable ultra-long issuance will be readily absorbed by this ‘latent’ demand — we believe much of this anticipated demand is overstated,” they wrote in a research note published on Wednesday.

They also cited accounting and hedging differences between U.S. pension funds and their overseas counterparts.

The U.S. government’s longest maturity is a regular 30-year issue it auctions each month. It also sells a 30-year Treasury Inflation Protected Security three times a year.

It sells about $175 billion worth of 30-year bonds annually.

Last week, the Treasury asked the primary dealers about investor interest in an ultra Treasury bond in its quarterly refunding questionnaire.

Primary dealers are the 23 Wall Street firms that do business directly with the Federal Reserve. The U.S. central bank requires them to participate at each Treasury auction to retain that status.

Credit Suisse is the latest primary dealer to raise doubts about the viability of introducing an ultra-long bond.

Reporting by Richard Leong

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