Pension Funds Buying Bonds to Rebalance Portfolios Could Boost Stocks

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Pension funds are expected to start buying bonds to capitalize on the recent sell-off and rebalance their portfolios.

Bonds have been selling off massively since the start of the year. The 10-year Treasury yield started 2021 at 0.93 percent and subsequently hit a high of 1.75 percent almost 3 months later. Currently, the 10-year yield is sitting around 1.674 percent.

Bond prices and yields work inversely so this would result in bond yields falling from their recent surge. Wells Fargo’s Michael Schumacher forecasted that corporate pension funds will have to buy around $125 billion worth of bonds in rebalancing efforts. He does not believe all of this buying will happen in the near future, but gradually.

Rising yields have decimated certain sectors of equities. The tech-heavy Nasdaq has fallen from recent highs with growth stocks getting killed. Rising rates implies higher borrowing costs which would negatively impact these high growth companies.

“That’s the tug of war that’s going on. On the one hand, you know there’s stock to sell because of the rebalance, but on the other hand the market has been very, very sensitive to yields that are stable to lower,” said Julian Emanuel, head of equity and derivatives strategy at BTIG. “That could be one of the catalysts that break stocks out of the trading range.”

Emanuel believes that the sell-off in tech stocks is exaggerated and that he expects growth stocks to benefit from the decline in rates following buying from pensions.

“We are firmly in the camp that despite the fact we think value over growth works in the long term, in the near term, upside is definitely going to be led by a moderation in the decline in bond yields spurring outperformance in large cap tech, specifically FANG,” he said.

Furthermore, he stated that the entire market might be at an inflection point.

“Between now and the beginning of April, we think the market is going to make its intentions known,” he said. “Whether it’s broad upside led by the laggards with financials participating or this whole idea of even if bond yields behave that the bloom is off the near term rose for the cyclical value trade,” he said. “It could be a substantial movement on the order of 10% one way or the other.”

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