Is This The Real Reason Why The Treasury Curve Has Been Collapsing For A Month?

Tyler Durden's picture

A 'funny' thing happened a month ago. The Treasury yield curve suddenly started to collapse... despite gains in stocks and positive economi data surprises... the question is, why?

Here's one possible reason why..

Originally submitted by GovTrader,

TL/DR: Tax reform creates pension fund incentive to buy 30yr bonds NOW.

Currently, the top corp tax rate in the US is 35%. It looks most likely that rate will drop to 20% when tax reform passes. If you are a corp with an underfunded pension fund, you get a tax incentive to fund the pension THIS YEAR vs in the future when the corp tax rate drops to 20%.

Why? Because contributions to the pension plan are tax deductible. You get a bigger tax deduction in 2017 then you will get in 2018 and onwards (assuming tax reform happens in something close to its current form...which it looks like it will).

Multiple primary dealers have reported pension buying in the 30yr sector over the past month, and coincidentally, 30yr bonds have rallied while the front end has sold off for the past month.

Pension funds have a favorite bond to buy...STRIPS (30yr zero coupon bonds - higher yield than normal coupon bonds, better asset/liability match..more price sensitive to changes in yield...bigger bang for your buck in a bond rally..and is a flattener to the yield curve). Pension funds don't trade very much....they tend to buy and hold.

So these flows will SIGNIFICANTLY flatten the 30yr curve...and that is exactly what we have been seeing.

US Treasury yield changes (basis points) since Oct 24, 2017

Mystery Solved.

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Newbie lurker's picture

There are no ‘real’ reasons anymore.

YUNOSELL's picture

So I guess what this article is really saying is that this could be a very artificial flattening of the yield curve and may not indicate a coming recession within the next 6 months to a year.

Kinda fitting since it suits the whole artificial economy now

BandGap's picture

It indicates that the inflows will stop January 1, 2018. Then the real ride begins.

It is not an investment, it is a tax dodge.

The Alarmist's picture

No, pension contributions for 2017 can be made as late as 15 September 2018, with tax deduction still attaching to 2017. This can take us to Black (pick your day) in October 2018.

But yes, a real unwind could happen as pension consultants, looking to generate fees for reshaping the clients' portfolios, tell clients that the bonds have hit their peak, that it is now time for mean reversion, and here's our bill.

Tolomeo's picture

Agree! But it also makes a shit load of sense!!!

Osmium's picture

I guess another question would be does the collapsing treasury curve even matter?  Ctl P and everything is just fine, trust us.

DavidFL's picture

Great - what happens when the tax package does an Obama Care repeal flop??

NoDebt's picture

Near as I can tell.... nothing.  It keeps right on going.  Good news sets it in motion, bad news doesn't have the opposite effect.


lester1's picture

No. It's because Trump's tax plan is going to blow a massive hole in the budget deficit. Who's going to soak up all these new US Treasuries notes to pay for the tax cut???


More debt to buy equals higher interest rates. The banks are front running the tax reform bill and gettingnready for blowing up of the national debt ! 

ceilidh_trail's picture

If this were the case, it would make more sense for them to wait and buy at higher yields.

lester1's picture

I know but Central banks and the Federal Reserve are run by stupid people with unaudited unlimited budgets !

MrSteve's picture

Bingo! the increase in deficits will make these zero coupon bonds a black hole to anyone who cares about preservation of capital. The higher rates will just kill any appeal of zero coups.

Four chan's picture

when the standard of value is zero intrensic no price discovery or market can be acheived.

Rainman's picture

meh ..I like the pre-recession explanation moar better.

gatorengineer's picture

pre-extended depression, we are about to go into double overtime on the depression.

govttrader's picture

If the Pension Funds are buying 30yr bonds, they are also buying stocks, to keep up the asset allocation ratio.  So, what happens to ES when the pension funds stop buying in Jan 2018?   BOOM.

Bush Baby's picture

They will buy stocks as well, but if the odds, logic and analysis favor a collapse in Jan or Feb, then it won't happen.

ceilidh_trail's picture

Many funds have preset ratios that they stick to. Few managers in those will stick their necks out. It's safe to match the market, a career killer to fail to do so.

adr's picture

It is a pretty stupid thing to do if you are going to buy and hold these bonds for the maturity to fund pensions. The rate of return is near zero and a tiny bear market in bonds will leave you dead in the water. 

Unless stocks tank 70%, there is little point in buying bonds at the current level. 

JohnGaltUk's picture

European bonds are going to zero. The event will start in Europe and then spread world wide.

any_mouse's picture

WW1 & WW2 started in Europe.

MrSteve's picture

Note also, these hot bonds are called zeroes. They only appreciate if rates go down, otherwise, you are locked into the discounted "rate" until they are "redeemed". If rates go up, these zeroes become "sub-zero total returners" only until they are held to maturity, ignoring all mark to market malarky and such which pension funds have never done, nor will they ever do.

BandGap's picture

All valid points. But they are not being purchased for their return opportunity. They are tax relief, in only until the real storm hits.

24Richie's picture

The short end is largely moved by the Fed.  The long end moves according to the perception of inflation. If inflation stays tame the curve will continue to flatten and could invert.

silverserfer's picture

the flea is wagging the dog?

eeaton's picture

How can a defined benefit pension plan be funded with 30 yr treasuries yeilding under 3%?

youngman's picture

Because the Venezuelan bonds they bought at 7%....oh well...see you in 30 years....maybe

indygo55's picture

Because,,,, "tax cuts",,,, come on man, dont ya get it. We'll all be rich. If they tax 100% of everyone they will still be broke. It's all in the message. Tax Cuts. Yeah!!

khakuda's picture

Great question, thank you.  Next question please.


My guess it that it is underpants gnome theory.

 Phase 1 - Collect underpants

 Phase 2 - 

 Phase 3 - PROFIT!

knotjammin2's picture

Agree!  I'm trying to figure out what I just read.  My BS detector went off scale.

Buckaroo Banzai's picture

This isn't about funding a defined benefit pension plan-- that's mission impossible at this point. It's simply about creating the illusion of funding it, and cashing in on a tax break before it expires is nice little short-term benefit.

MrSteve's picture

Ixnay on the ean-may!  We make nice to collect our fees.

Catullus's picture

I didn't know pensions were subject to corporate tax rates on bond appreciation

Madolf Sanders Hitler's picture




They're busting the 2/30yc by 35bp in 1mo for 40cents (.004 of initial outlay) in yr1 of a 30yr product?? not likely