Pension Panic: STRIPs Soar By Most Ever In October

While today's stellar 10Y auction coupled with the spike in 10Y yields to 3.23%, or just shy of fresh 7 year highs, dominated the attention of rates traders today, a potentially bigger development crossed largely under the radar late in the day when the US Treasury reported a whopping $12.227 billion increase in STRIPs outstanding in October, which was the largest monthly increase on record.

The level of outstanding STRIPs increased surged to $301.528 billion in October from $280.300 billion in September.

As Oxford Eco notes, the October net increase in STRIPS outstanding doesn't take into account the approximately $0.291 billion in STRIPS outstanding that matured during the month. As a result, the change in STRIPS outstanding is not solely indicative of net stripping and recon activity, and adjusted to account for the maturing issues the change in STRIPS outstanding net of maturing issues was an even greater increase of approximately $12.518 billion.

While net stripping activity in notes and TIPS is generally minor, the same can not be said for bonds. Indeed, net stripping activity in October was led by an enormous net stripping of $4.171 billion of the 3% of 2/15/47 off the run bond, but there was also more than $1 billion net stripped of seven other issues – the 2 7/8% of 11/15/46, the 3 1/8% of 5/15/48, the 3 3/8% of 5/15/44, the 3% of 5/15/47, the 3% of 2/15/48, the 3 3/4% of 11/15/43, and the 3% of 8/15/48. The combined net activity in bonds amounted to a $12.431 billion net increase of stripped issues to $292.034 billion, or 13.63% of the outstanding.

What prompted October's record stripping activity?

While it is difficult to discern the cause of the month-to-month changes in net stripping activity, it is notable that the the immense net stripping in October occurred as equity markets plunged. That most likely caused some investors with specific duration liabilities - such as pension funds or insurance companies who are the usual suspects behind Treasury stripping - to scramble out of falling riskier assets and into the security of STRIPS issues that match their liabilities.

In other words, rumors of pensions funds no longer buying Treasurys have been greatly exaggerated. So much so, in fact, that pension funds appears to have bought a record amount of Treasurys last month as risk assets plunged.