Data Revision Reveals Pensions Buying Far More Treasurys Than Previously Known

When we compiled yesterday's Household Net Worth report for the second quarter, which is contained in the Fed's quarterly Flow of Funds report, one thing stuck out: extensive data revisions to the nominal dollar amounts in both the Pension Funds and Corporate Bonds category.

We now know the reason: as Bank of America's Hans Mikkelsen explains, in recent years and most recently in Q1, the Fed indicated that private defined benefit plans bought corporate bonds in recent years "but little Treasuries." This is shown in the chart below.

However, as BofA observes, the latest data revisions as of 2Q shows the opposite: that Pensions bought Treasuries but little corporate bonds.

Here, BofA makes a good observation:

"We knew that the Fed's flow of funds data is subject to large revisions, but in light of such revisions we are increasingly pondering whether it is useful at all."

That is a valid concern since after the GDP and unemployment report, the Flow of Funds is arguably the most report providing a glimpse on the state of everything from the financial sector, to the net worth of US households, which as we explained previously, is merely a "plug" category, yet which is so critical in determining whether US households are getting richer or poorer.

As for the pensions revision, at the very least the revised pick-up in pension buying of Treasuries this year is consistent the odd increase in stripped Treasury volumes which we documented previously.

What may have caused the Fed's error? One explanation is that stripped Treasuries were previously mis-classified as corporate bonds.

In any case, if the new data is correct, it would help explain the lack of flattening of the back end of the corporate yield curve this year relative to the Treasury curve (something we first discussed last year), where we now know that Pension funds have been an active buyer.