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Pensions Pouring Money Into EM Debt
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Steve Johnson of the Financial Times report that pensions pour into emerging market debt:
US pension funds are poised to pour almost $100bn (£62bn, €70bn) into emerging market debt in the next five years, according to JPMorgan.
The impending buying spree will be augmented by strong flows from central banks desperate to diversify out of the dollar,
industry figures believe, bolstering the ongoing rally in emerging
market bonds and potentially pushing yields relative to US Treasuries
to a record low.
“We expect a long-term structural bid [from US
pension funds] for emerging market debt,” said Will Oswald, global head
of emerging market quantitative strategy at JPMorgan.
Jerome
Booth, head of research at Ashmore Investment Management, an EM debt
specialist, said: “Pension fund consultants are being inundated with
requests.”
Demand is being
driven by the 2006 Pension Protection Act, which came into force in
2008 and compels US corporate pension funds to discount their future
liabilities using a market interest rate, rather than using their
expected rate of return on their assets, as public sector funds can.
This
is pushing corporate funds to sell equities and buy bonds, as they seek
assets whose value moves in line with the new discount rate. In the 10
months to August 2009, US corporate pension funds increased their
allocation to bonds from 32.4 to 38.4 per cent, according to Towers Watson, with further buying expected this year.
JPMorgan
said there were signs much of this would go into emerging market debt
as pension funds sought the higher yields and longer duration of the EM
universe, where 30-year bonds are commonplace, allowing pension funds
to hedge liabilities more accurately.
Inflows are likely to be
bolstered further by the benchmark sovereign bond index, JPMorgan Embi
Global Diversified, attaining investment grade status earlier this
month.
According to JPMorgan,
corporate US pension funds currently have just 0.3 per cent of their
assets in EM debt. However, funds that have rebalanced have typically
moved to a 5-7 per cent allocation, a figure Mr Oswald argued was
“realistic” across the whole sector within three to five years.
With
corporate US schemes holding $1,400bn of assets, this implies $90bn of
fresh investment, a significant sum compared to the $300bn currently
benchmarked against the JPMorgan indices.
Mr
Booth added: “The Pension Protection Act is motivating a lot of
corporate plans in the US. They can increase their duration by a year
and their yield by 130 basis points by putting more money into EM debt.
And the index becoming investment grade means it will be seen as much
more investable by a wide range of institutions.”
Robin Creswell,
managing principal of Payden & Rygel Global, saw potential for
“substantial demand” from pension funds, as a result of improving
economic fundamentals across emerging markets and the fact that yield
spreads are above 2007 levels, despite EM debt being investment grade.
EM
debt is also receiving a shot in the arm from Asian central bank
reserve diversification and petrodollar recycling, according to Mr
Oswald. “We continue to get enquiries from central banks.”
Mr
Oswald saw the potential for a bubble to emerge, but Mr Booth argued
supply would rise to meet demand and that yields on local currency EM
debt had the potential to fall to below those of US Treasuries.
Whenever I read that pension fund consultants are "being inundated with
requests," my antennas go up, as does the hair behind my neck! A
potential bubble in emerging market debt? Highly likely but we will
find out soon enough when market expectations of Fed rate hikes
abruptly shift in Q1 2010. Till then, money will keep pouring into
all risk assets, including EM debt.
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Leo... Keep the pension info flowing. Anytime your liability is in one currency and you've speculated in another you've got huge risk. It realy doesn't mater because pension plans only exist to create fees and bonuses and have never had the best interests of the pensioner's at heart (never).
Not only debt....ABP the 3rd largest pension fund in the world decided to increase the emerging market equities.....say no more
so Leo, you buying this dip ? (equities)
...but what if... Solars are destined to be low down on the value chain?
everything will change when 30y UST trade above 6%.. EM bid will go away, USD rally... but for now its EM party
Hey does anyone think the Boeing plane that went down
after takeoff from Beirut bound for Ethiopia with 92 passengers on board may be an act of terrorism?
Bin Laden quacked recently...
what will you buy with your doelarrs other than doelarr denominated assets? the other currencies are backed by doelarrs, after all. some stocks fine, solar tech, oil, miners, but it will be such a crap shoot to pick the right ones. there will be less than 12 dozen stocks making 33% real growth (nominal bullshit will not matter once the hype sets in). pensions are PHUCKED!
asia looks very confused tonight...they have pensions too.
they long risk... every mama-f*ker long risk... but monday effect is on. so market will rally on monday and tuesday (may be???) to go down on Wed
Deep,
If you don't agree with Leo's posts, please do so in a respectful manner, and back up with facts not just insults.
I don't agree with a lot of Leo's points but if they make me think, and even prove my own thoughts wrong, then there is value.
Leo, with regard to solar stocks, I read an interesting piece in Time a week ago that said there has been oversupply (particularly in Chine) of solar cells/panels. While I think, long term, solar will be good, I can see a fall off in the short to medium term (particularly if we are onto the next leg down of the bear market).
DavidC
With all due respect people have to earn people's
respect. Nothing he has said is thought provoking
in any way shape or form for me. Several weeks
ago I made it clear he has zero value added to me and
his posts just anger me. Do you think his response was
polite hardly so I had to reduce myself to his level
in order to send a clear message I don't want to
hear from you again period end of the story. You are
coming in way late to this party and lacking
any background I recommend you steer clear. Your
opinion on my manners has no merit and you shouldn't
feel comfortable comment knowing little about the
scenario. Happy days trading solar stocks I hope
you make a fortune. This blog was meant to be about
EM not solar stocks anyway where in the FT article
that everyone read in the FT anyway does it mention solar
stocks? No reply required.
Thanks David C, but I take these articles warning of an "oversupply of solars" with a grain of salt. We shall see when the solar companies report the earnings how demand is really doing.
Thanks again and I apologize for my earlier rant.
Never bet against a country that has $2 trillion in cash
As the joke goes... It is the same with your money and your manhood - Stick it into excotic places and you risk losing it all....
In my country, there's a minimum savings rate backed by the Constitution of 6%/year (Brazil), therefore BCB funds rate will never get lower than 6%+inflation unless they change the Constitution.
If I were born in a developed country, that would sound interesting to me...
Stick to your specialty, cut and paste master and please no market comments
YOU FUCKING LIAR
Exactly god almighty man when are you going to be
ahead of the curve in anything? If it's in the
press and talked openly it's not new news it's
a confirmation trade at best. You are about a year
too late on this scoop. How about this EM desks
have been busier than a cat in a fish store for
most of 2009 where have you been in a coma? It
must have taken your antenna some time to go
up because they must be so bent they resemble 20 year
old rabbit ears with tinfoil on the tips for better
reception. I'll say it again a broken bullhorn.
Don't even try and respond to this I've been in
EM for 20 years. You need to be verbally suicided.
And don't even ask me what that means figure it out.
And don't make any sophomoric blog rebuttals I have
things to do with my time on Sunday evening like
read a good book. If I decide to watch the boob
tube can I borrow your antenna in case my reception
is bad? Don't answer that please.
Yet another moronic comment from another hopeless fool.
Well Mr. Lagging indicator did you see what your good
friends Moore Capital did last year? How come you
weren't clued in? In regards to the above comment
who are you referring to? yourself? You can't
even take direction I asked that you not respond
with a sophomoric remark. Let me end this "debate"
now in a manner you are accustom, shove it up your fat ass. Any and all further corespondence from you will be promptly deleted unread.
Lagging indicator, me? LOL! And what friends at Moore Capital? I have no clue what you are talking about so keep on spewing nonsense.
on Sun, 12/13/2009 - 09:46
#161969
And who the hell are you? Another pension pussy or dimwhit invesment banker with his head up his ass?Wrong again asshole. Weren't you the racist who made comments against Mexican immigrants?
Deep stop being such a douche. I am accumulating solar shares whenever they sell off strongly. If you don't believe me, that's your problem. Deal with your deep insecurities before posting retarded comments.
I second that
First you "trade for a living", then when I questions how do you keep managing to buy the dips, I said "either you are the world's best trader to keep selling the peaks, or you are margined to the tit, or you are a FUCKING LIAR".
You then respond back that you also consult. How convenient.
I STAND BY MY POST YOU FUCKING LIAR
Deep,
Go to my blog, read my profile. That was written when I first started the blog and back then I was consulting and trading for a living. In my current job, I have no time to trade. Nor do I really have an interest. I save my money, and buy opportunistically. Why would I lie about buying solars or about other personal stuff like my struggle with MS? It's all there on my blog. Whether or not you or anyone believes me is no skin off my back. I really don't care but you should think before attacking my credibility. People like you are why I stopped allowing comments on my blog.
PCY
http://finance.yahoo.com/q/hl?s=PCY
it recovered its share value to the pre-credit crunch levels, which in turn does not make sense (Ukraine + Venezuela 12+% of fund.)
also, historically it is one of the most risky (insane) of the fixed income asset classes.
I guess over shooting their allocation targets when it came to alternative assets was not a good enough lesson for 'em. :(
I still think that one of the motives by pension funds to invest into alternative assets was the low volatility on paper of those assets. It turned out the real life holdings were more volatile than most even pessimistic expectations.