GLOBAL – Barclays Capital says pension managers will continue to move into longer-dated paper via the cash market until they are comfortable with swaps.
“We expect 30-year spreads to widen versus 10-year spreads by year-end, primarily because we believe money flows related to pension reform will be expressed more in cash product – ie, Treasuries/Corporates/Agencies, rather than in swaps,” Barclays said in its global outlook for the second quarter of 2005.
“It simply will take time for pension managers to increase their comfort level with swaps.”
The bank noted that the European pension and insurance sector reform has clearly driven the long-end of the nominal market “richer”.
But its said the impact on long inflation-linked bonds was “less clear”. The report said the introduction of 50-year issues recently had taken away demand from bond buyers just looking for duration who previously bought 30-year “linkers”.
It added: “The vast majority of Dutch pension funds have officially abandoned soft indexation, having previously offered indexation every year provided there was not an underfund.
“Many still have a desire to meet their previous commitments though, but it is only well-funded schemes that can realistically do so.
“If nominal yields and equity markets rise, this may produce a significant increase in demand for long inflation-linked bonds, but in the meantime there are few natural buyers.”
Overall, Barclays said global financial markets are at a turning point, “as the benign conditions that have supported markets over the past couple of years are becoming less friendly”.