Traders are perplexed by today’s market action: not only did the S&P stage a dramatic intraday reversal from session highs, and all three indices are now red on the day, but so far the BTFD ETF flows are missing. What gives?
We may have an explanation courtesy of Credit Suisse, which writes in a trading note that U.S. pension funds that rebalance monthly – which is most of them – will have to sell more than $12 billion of U.S. stocks in the coming days to return to prior asset allocation levels given recent rally in the stock market – the S&P is up 6% YTD while bonds are down just shy of 1%.
As a result, CS calculates that funds are expected to sell a sizable $12BN in equities and buy roughly $24b in fixed income. The amount of selling, CS writes “would be the biggest in at least a year for a month that does not coincide with quarter-end.”
Bloomberg confirms as much writing that today is the trigger day for month-end rebalancing, and warns that today’s action may be a signal to expect pension rebalancing over the next week.
What about in the longer-term?
Over the weekend, JPMorgan’s Flows and Liquidity note revealed that “the average long-term sovereign yield level at which pension funds would start de-risking was 2.8% and the yield at which they would expect to be fully hedged was 3.7%. The 30y UST yield at 2.9% currently has already crossed the 2.8% level mentioned in this survey.”
Furthermore, JPM calculations suggest that this year’s 5% rise in equity prices alone could create up to $125bn of pending rebalancing flow by US defined pension plans.
We look for G4 pension funds and insurance companies overall to buy a lot more bonds than the $460bn bought last year, and for their bond buying to return to at least the 2016 pace of $640bn. In fact, we see upside risks to this projection assuming equity markets remain strong.
To JPM the news is bullish for the long-end of bond curves: “This pension fund rebalancing flow should support the long end of DM bond curves causing further flattening this year.“
As to what forced pension selling of stocks will mean for equities, we may find out in the next few days…
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