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Opportunities in Long Duration for Pension and LDI Investors
The last time yields on long corporate bonds were in the 6% range was 2009 and the average funded status (assets to liabilities) in defined benefit (DB) pension plans was around 80%. Today, yields on long corporate bonds are back to around 6%, and many DB plan sponsors are enjoying funded statuses of over 100%, making this a potentially opportune time to lock in funded status gains.
Darren Hewitson, CFA , Senior Portfolio Manager, discusses opportunities in long duration for pension and LDI investors.
Key Takeaways
- Yields on high quality, long duration bonds are at levels that haven’t been seen since the Great Financial Crisis (2008-2009), leading to opportunities for incremental investing.
- The recent combination of rising yields on long corporate bonds and improvements in DB pension plan funding has created a “sweet spot” for plan sponsors looking to lock in funded status gains.
- While investors in long duration corporate bonds may give up some degree of liquidity, we believe that if they focus on high quality securities and remember that LDI is a long-term, risk mitigation strategy, the premia earned for taking those risks makes sense over time.
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