Pension and insurance demand for "juicy" investment grade paper seems to be insatiable. Per Bloomberg data, $962 billion of IG paper has been issued so far in 2016 putting issuance for the year on track to set an all-time record. August issuance alone was $115 billion, the highest level recorded in 12 years, and the current pipeline for September includes $120 billion of new issues.
Obviously it's not terribly surprising that funds would flow out of sovereign debt markets and into IG bonds with over $13 trillion of sovereign paper now carrying negative yields (see "With Over $13 Trillion In Negative-Yielding Debt, This Is The Pain A 1% Spike In Rates Would Inflict"). That said, as we've pointed out before (see "Pension Duration Dilemma – Why Pension Funds Are Driving The Biggest Bond Bubble In History"), pensions aren't just "reaching for yield" they're also "reaching for duration" in an attempt to match their asset/liability duration. The problem is that by "reaching for yield" (or "reaching for duration" if you prefer) large pension funds enter into a negative feedback loop that only serves to exacerbate their problem. As billions of dollars are plowed into longer-dated securities the yields of those securities are driven even lower. Even worse, as yields fall, negative convexity causes the duration gap between assets and liabilities to expand. With that, pensions have no choice but to go even further out the yield curve and the cycle continues.
The problem, of course, is that these rates have been artificially engineered by misinformed Central Banking policies and will, at some unknown point in the future, be unwound creating spectacular losses for the pensions and insurance funds holding the paper. The Securities Industry and Financial Markets Association estimates there is about $8.5 trillion of corporate debt outstanding in the United States with an average maturity of about 15 years which means every 1% increase in yield will destroy just over $900 billion in value.
But, we suppose it doesn't really matter if pensions destroy their asset base as long as their completely fictitious liability valuation also declines then all will be well in the world. Right?
via http://ift.tt/2bFbR3H Tyler Durden