No, The Surge In Treasurys Wasn't Due To "Pension Fund Buying"

Tyler Durden's picture

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).

So, confusion.

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.

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PartysOver's picture

Are you sure the buying is not from Belgium?

knukles's picture

It be a Liquidity Trap.
Getchur yield while you can.
And I don't mean just Treasuries.....

Let's be careful out there, people....

SamAdams's picture

I'm tellin' ya, Greece and Ukraine are buying treasurys hand over fist!

Stoploss's picture

They were rotating until they got tipped off ECB was going negative on rates, so they bought stocks instead, should be a split between both stocks and bonds.

And moar stocks.

VIX should go negative along with negative rates, has to play catch up.

AlaricBalth's picture

I think you spelled "Belgium" incorrectly. It is spelled " F E D E R A L R E S E R V E".

ebworthen's picture

Flight to safety.

Equities are being floated and will crash like in 2009, it's just a matter of when.

Buying Treasuries is buying insurance.

knukles's picture

Ain't gonna be any bell ring, but one day the world is gonna wake up to the fact that there are no earnings to support the P/E's and it shall change.
When, I have no idea.
It will go on until it stops.
And when it stops it will be rather painful.
This whole thing is being floated on a veritable sea of liquidity accompanied by no real activity.

Booyah, as Somebody's Brother(niot mine! like claiming a fart) Cramer might say.

LawsofPhysics's picture

"Flight to safety." -  This always cracks me up.  Yes, if one ignores what those treasuries are priced in of course.

Silver still on sale!

ebworthen's picture

True that.  Perceived flight to safety.  Stacking.

AlaricBalth's picture

Reality is irrelevant. Perception is everything.
(Until it's not)

NoDebt's picture

So, in summary, nobody is buying Treasuries, which is why demand for them is so high.

"Nobody goes to that restaurant any more.  It's always too crowded." 

knukles's picture

The New Normal
   -Yogi Berra

CrashisOptimistic's picture


Which means the one most probably option still remains on the table: bonds are simply being bid because the economy continues to grind slower,


All numbers can be changed by gov't whim, with the exception of oil.  Therefore only oil can take the system down.

And it will.  In a particular order.  1st, equities.  2nd, bonds.  So descent will be the order of the day, per the reality of slower and slower economic activity ala Japan, which leads to bond profits.  The day equities are smashed, bonds will explode. 

Then you have a few hours to get out of bonds, too, with those profits.  Because when oil takes it down, it will take it all down.  Just not simultaneously.


Martin T's picture

According to Bloomberg data Japanese investors bought $ 86 billion worthif US treasury bonds in the last12 months.

CrashisOptimistic's picture

Shrug.  Non-Fed American investors probably bought even more.  Every bond mututal fund with auto reinvestment buys more bonds at the end of each month with the monthly payout.

Fijiaaron's picture

Japan has been nothing but a credit card for western investors for at least a year.  Borrow money to buy Yen, borrow against your Yen.  Repeat.

101 years and counting's picture

smart money buying UST and selling the the top....same as it has always been.

whatsinaname's picture

thats what I read 6 months ago too and a year before that and 2 years before that.

fiboman's picture

bonds are medium term  bullish and both TLT and TIP are moving towards 120

gaoptimize's picture


GDP: $419.6B (PPP, 2012 est.)

US Treasury Holdings:  $381.4B (Wkipedia end of May)

Ratio to GDP: 75%

Percent change since Mar 2013: +102.4%

gdpetti's picture

Currency swaps arrangements to the rescue and just in time. Your central bank scrathes my back/bonds et al and my central bank scratches yours.