NEW YORK, July 24 (Reuters) - Impending tax reform has spurred U.S. companies to shift billions into corporate pension plans, increasing demand for longer-dated maturities enough to help flatten the yield curve, according to new research from Goldman Sachs.
Pension sponsors from PepsiCo Inc to Verizon Communications will contribute an estimated $60 billion to their plans in 2018 in order to qualify for tax deductions before the new lower rate of 21 percent comes into effect in mid-September.
The aggregate value of corporate pension plan assets was 89 percent of their obligations as of June 2018, versus 81 percent at the end of 2016, according to a research note published Tuesday by Michael Moran, pension strategist at Goldman Sachs Asset Management.
The funding trend began last year, with $63 billion in corporate contributions to pensions, the highest amount since 2003.
Pensions move assets from equities into long-duration bonds as funding levels improve, in order to reduce their portfolio risk. That has driven up demand for longer-dated corporate bonds and 10- and 30-year Treasuries. Goldman Sachs estimates that U.S. corporate pension plans will buy $150 billion in long-duration bonds each year for the next several.
From 2018 highs hit on May 18, the yield on the benchmark 10-year Treasury note is currently down by 18 basis points to 2.95 percent, and the yield on the 30-year bond is down 19 basis points to 3.08 percent.
“U.S. corporate defined benefit pension plans have been, and will continue to be, significant buyers at the long end of the curve,” said Moran.
Their impact on yields may become even more pronounced. Future issuance of corporate bonds may decline - owing to higher rates, the recent glut of offerings and tax repatriation changes, according to Goldman - which would drive up demand for Treasuries further. (Reporting by Kate Duguid Editing by Susan Thomas)