One after another pundit has tried to explain the relentless bid for US Treasurys, and failed. First it was the March geopolitical shock, and the "capital outflows" from Russia that were supposedly entering the "safety" of US paper. Well, today Russian stocks just hit a bull market from the recent sell off (despite, or perhaps in spite of, Draghi's idiotic "estimate" of €160 billion in Russian capital outflows), however without a comparable move lower in the 10 Year, meaning it was not Russian capital reallocation that was pushing US Treasurys higher. Then, a new theory appeared, namely that pension funds, seeking to lock up equity upside, will "reverse rotate" out of stocks and into bonds. Judging by where US stocks are trading, they certainly did not rotate nearly enough, and now courtesy of Bank of America which parsed the latest Flow of Funds report, we learn that the in fact "buying of bonds by pension funds slowed down significantly in 1Q."
Specifically, pension funds bought a tiny $7 billion (or about 3 POMOs worth) of Treasurys in the entire first quarter, down from an average of $35 billion in Q3 and Q4. And it wasn't just Treasurys: pension funds also reduced buying of corporates.
Finally, so much for Pension Funds dumping stocks: "The selling of stocks also slowed down, although less dramatically, to $42bn in 1Q from $48bn average in 3Q and 4Q of last year ."
From Bank of America:
The Federal Reserve Flow of Funds flow of funds data released today show that buying of bonds by pension funds slowed down significantly in 1Q. The new data for 1Q as well as revisions to prior quarters show that pension funds bought $7bn of bonds in 1Q, down from an average of $35bn in 3Q and 4Q of 20131. The selling of stocks also slowed down, although less dramatically, to $42bn in 1Q from $48bn average in 3Q and 4Q of last year (Figure 5). As we highlighted yesterday (see Back–end spread flattener), the less than expected pension fund demand this year following the decline in interest rates and lower funded levels contributed to the significant steepening in the 10s30s high grade corporate spread curve. We expect instead stronger pension fund demand in the second half of the year as interest rates go back up to result in re-flattening of the high grade corporate spread curves.
In terms of individual instruments, pension funds reduced buying of both Treasuries and corporates in 1Q. Pension funds bought $9bn of Treasuries in 1Q, down from $21bn average in 3 and 4Q of last year. Pension funds also sold $0.7bn of corporate bonds ($2.8 in terms of an annualized rate), compared to net purchases of $10bn per quarter on average in the second half of last year. The largest reductions in buying of corporate bonds were among private and state & local funds (Figure 4).
Funded ratios for both private and state & local funds were little change in 1Q according to the Federal Reserve data (Figure 6, Figure 8). At the same time, both types of funds reduced the pace of the reverse rotation in 1Q (Figure 7, Figure 9).
It has long been known that the Z.1 is consistently and significantly inaccurate when capturing actual flow of funds, full of plugs and estimations, but in the absence of a better source of data, it will have to do. Here is what it said the other investor types did in Q1:
Insurance companies have kept the pace of purchases of both bonds and equities in 1Q little changes vs. 4Q-2013 (Figure 10). At the same time, mutual funds engaged in a reverse rotation: increasing their buying of bonds in 1Q while reducing the buying of stocks (Figure 11). Finally, foreigners continued to buy bonds, although at a slower pace relative to 4Q-13. Foreigners also bought US stocks in 1Q after being net sellers in 4Q-13 (Figure 12).
But one thing is apparently clear: anyone who wants to blame the constant contrarian buying in Treasurys (but... but... the economy is improving) on exogenous factors or reverse rotations, has so far been proven wrong. Which means the one most probably option still remains on the table: bonds are simply being bid because the economy continues to grind slower, despite what Fed-manipulated equities are telegraphing, and until there is real, credible proof that the economy is once again improving, expect the pundits to continue scratching their heads or other parts of their bodies.