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How the Bond Markets React 02.18.05
An Unanimous Call for Length
Pension problems have created new problems for the fixed income market. Many investors are not aware of the shortfall in pensions and how they will affect the bond trade but the underestimated numbers recently announced by the Labor Department speaks volumes. Elaine Choa spoke to the issue suggesting that many defined benefit pensions have missed their projections by nearly $450 billion.
Changes in the current actuarial rules would send this vast sum shopping for securities and this has brought the call for the 30 year long bond to be reissued. The Treasury stopped issuing this bond in 2001 citing the expense of long term borrowing. Traders however are beginning to suggest that times have changed and with the yield curve experiencing volatility, the disappearance of the surplus - the other reason the bond was pulled, and the possibility that these deficits will be a long term problem, the 30 year long bond is more important than ever.
The price on the 30 year long bond has climbed recently as a result of this rule change. In fact, the Pension Benefit Guaranty Corporation has also started to change their investment strategy to target some of their own underestimations. PBGC is basically an insurance company sponsored by the federal government, collecting premiums from member companies and insuring the retirement plans from default. The agency has come under pressure recently because of the large amount of plans it is now responsible for, which has caused much concern in the fixed income markets.
The reluctance of the Treasury to reissue this bond has become endemic of the leadership at the department. The argument is simple. Worldwide, the yields on long issues have remained incredibly low. It stands to reason that the US offering would also be kept low. Offering the long bond would be beneficial for tax payers and that should be reason enough.
Inflation worries have piqued with the release of the Wholesale Producer Price Index. The oddly important core number that rose 0.8% against an expectation of 0.2%. The effects of this number will be spread across many markets.
In fixed income securities, the yield curve that had be worrisome because of flattening will steepen as investors look to protect themselves from inflation. The worry that Mr. Greenspan will push the short term rates higher as a result of this problematic number also should push the yield higher.
In stocks, this would have the greatest effect on inflation sensitive issues that would include dividend producing equities.
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