Swiss pension funds are reassessing their exposure to US Treasuries as concerns mount over US fiscal politics, the scale of federal debt, and concentration risks in global bond indices.
Pensionskasse SGR SSR, the CHF4bn (€4.3bn) pension fund for employees of the Swiss broadcasting corporation, has taken the most decisive step so far, excluding US Treasuries – and all foreign government bonds – from its portfolio.
The move followed a tougher internal assessment of the creditworthiness of highly indebted sovereigns, and a desire to raise credit risk and diversify returns, chief executive officer Emmanuel Vauclair told IPE.
“US Treasuries no longer play a role in our portfolio, and a strategic adjustment is not planned. The allocation to foreign government bonds will remain at zero,” he said.
Across the market, direct exposure of Swiss schemes to US Treasuries sits at roughly 2% of more than CHF1trn in total assets.
Pensionskasse Manor is also keeping foreign-currency bonds on a short leash. The retailer’s scheme maintains a modest 3.50% strategic weight, but CEO Martin Roth said the fund is tactically underweight.
“Based on tactical considerations and our rather negative outlook for US Treasuries, we have currently underweighted this allocation by approximately 1%, meaning our exposure to US Treasuries is only 0.5% of total assets,” he said.
The pension fund will revisit its position as part of next year’s asset liability management study, though Roth expects its strategic stance to remain broadly unchanged.
Concentration concerns
Swiss pension funds have stepped up their focus on concentration risks across portfolios, mirroring the scrutiny already applied to global equities. A similar lens is now being used to evaluate global bond allocations, according to Luca Tonizzo, PPCmetrics’ managing director and head of team asset manager selection and controlling.
Recent budget brinkmanship in Washington – culminating in the longest-ever US government shutdown – has revived questions around the perceived safety of US Treasuries.
Some international asset managers have already shifted to strategies excluding US bonds, said Tonizzo. However, the consultant sees little evidence of Swiss schemes making similar strategic or tactical exits.
US Treasuries continue to underpin Swiss ALM frameworks.
“The Swiss bond market is too small to meet the demand for bonds from Swiss pension funds”
Luca Tonizzo at PPCmetrics
“This is because the Swiss bond market is too small to meet the demand for bonds from Swiss pension funds. For this reason, US Treasuries continue to play a significant role for the pension funds,” he added.
Replacing Treasuries with corporates, equities or alternatives would push pension funds up the risk spectrum and likely fall outside their risk tolerance, he argued. Moving into lower-rated or less liquid sovereigns would bring its own problems.
Turning away from the US market simply shifts risk elsewhere, Tonizzo and Stephan Skaanes, also of PPCmetrics, wrote in a recent article.
“Thus, theoretical diversification quickly reaches its practical limits,” they noted.
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