Why The Treasury Curve Has Been Flattening Like A Pancake: Pension Fund Buying And Tax Reform

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.

1 Month of US Yield Curve Changes

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

So, step 1, Mystery Solved.

But Wait, There's More.  If corp pensions are buying 30yr bonds, they are also buying stocks, to keep their relative portfolio weights stable (explains the recent stock rally). 

However, come Jan 1 2018, that buying will evaporate, and then DOWN GOES FRAIZER (Fraizer is the US stock market).


Follow my thoughts on twitter @ https://twitter.com/govttrader


Imagery Tue, 11/21/2017 - 14:24 Permalink

And how exactly are they making Pension distributions to the boomers now retiring at 12k per day plus if they are only buying Zero Coupon Bawnds?

NumbersUsa Tue, 11/21/2017 - 17:32 Permalink

Oy vey! Now, seven flags over Texas? by hedgeless_horseman Nov 20, 2017 12:30 PMIT"S GONEIsn't it amazing how much power the jew supremacists have to make articles exposing their takeover of America disappear and replace them with articles featuring giant dildos for goy amusment.Ripped out of ZH's lineup : http://www.zerohedge.com/news/2017-11-20/oy-vey-now-seven-flags-over-tex...you can't even find it in a ZH search.Call your Congressman, Senator & the WhiteHouse and let them know we want the zionist neo-con dual citizen jews out of all areas of our government NOW! For the President-White House switchboard at 202-456-1414White House comment line: (202) 456-1111To call your Member of Congress: US Capitol Switchboard (202) 224-3121 (just ask for your Congressman or Senator)