bofa-us rates

Accessibleversion BofAGLOBALRESEARCHBofASECURITIES USRatesWatch Privateppensionfundrebalancingupdate Privatepensionfundrebalancingupdate28Oetober2022 WeusetheframeworkintroducedinPenskonfundrebalanclngandUSTdemand,toRatesResearch estimatetheexpectedOctobermonth-endrebalancingflowsUnitedStates Therebalancingneedsofaportfoliothatcontainstwoassets(withallocationweightsBrunoBraizinha,CFA wland1-w1)andNassetsundermanagementisafunctionoftherelativetotal astrsSerstrgist Bots perfomanceofthetwoassetclasses(r1-r2):bruno.braizinha@bofa.com Rebalance=N*w1*(1-w1)*(r1-r2) USRatesResearchBota WiththeS&Ptotalretuminthemonthtodateatc.6.3%andthe10-year+USTindex showingac.-4.8%totalreturnoverthesarneperiod,theexpectationisforrebalancing flowsfromequitiesintofixedincome. Inourframework(seebelow),weseec.$50.5bnofrebalancingflowsoutofequitiesandintofixedincome(thestandarddeviationofmonthlyequityrebalancingflows -16468558846 SeeTeamPageforLstofAnayst C:circa Fl:fixedincome overthelastthreeyearsisc.S33bn,soOctoberrebalancingflowsarelikelytobe significantinthiscontext).InFlspace,theflowsbreakdownasc.S18.5bninto GSE:goverrment-sponsoredenterprise Treasuries,c.$27bnintoCorporates,c.S$4.5bnintoAgencyandGSE-backedUST:USTreasury securities,andc.S0.5bnintoMortgages Onlypartoftherebalancingislikelytobeperformedatmonth-end:weexpectedthe largerpartoftherebalancegenerallyatquarter-end,reflectingthebroaderrelative adecentgaugeforabroaderclassofinvestorswithrelativelystableallocatiorsand quarterlyrebalancingneeds. Itisimportanttonotethatbeyondthepassiverebalancingflow,wecontinuetoexpect toseesomestructuraldemandfordurationfrompensionfunds,particularlyasfundedratiosreachlevelscloseto100%(aswediscussedrecentlyinGlobalPensions& Insurers:TheLkSrare).Inthede-riskingprocess,thebroaderpensionfundallocation profileconvergesovertimetoatargetallocationwithsignificantlyhigherfixedincomecontentsandlowerequityexposures.Thisstructuraldemandislikelytopersist medium/longerterm. Tradingideasandinvestmentstrategjesdiscussedhereinmaygiverisetosignificantriskandarenotsuitableforallinvestors.Investorsshouldhaveexperienceinrelevantmarketsandthefinancialso(SareqsjoseaplasauSu/ddeoujSusuesassoAuequoqeorsasunosou reports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictof interestthatcouldaffecttheobjectivityofthisreportiInvestorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirimvestmentdecision Refertoimportantdisclosuresonpage3to4. GsfAGLDBALRTSEARCH Methodology Thedatasourcesweuseinourframeworkarepensionfundallocationweightsobtained fromtheFederalReserveBank(FRB)Z.1releaseandtotalretumperformanceforeach oftheassetclasses.Criticaltothisprocessisthechoiceoftheappropriatebenchmarksthatdefinetheperformanceofeachassetclass. TheFRBZ.1releasesegregatesprivatepensionfundassetsinto(1)checkabledepositsandcurrency:(2)timeandsavingsdeposits;[3)moneymarketfundshares;(4)securityrepurchaseagreements;(5)openmarketpaper,akacommercialpaper;(6)Treasurysecurities;(7)agencyandGSE-backedsecurities;(8)corporateandforeignbonds;(9) loans(mortgages);(10)corporatesecurities;(11)mutualfundshares;(12)unallocated insurancecontracts;(13)assetsofprivatepensionplansheldatlifeinsurance(LI) companies;(14)contributionsreceivable;and(14)claimsofpensionfundonsponsor(unfunded)definedbenefitpensionentitlements. Inourapproach,weaggregatetheseintoequities(10+11),fixedincomesecurities(6+7+8+9),andotherassets.Together,thefirsttwogenerallyamountto70-80%oftotalassets(5-10%inTreasuries),Foreachoftheseassets(6-11above),weassignabenchmarktocalculatetheirexpectedperformanceforexample,theS&Ptotalreturn fortheequityportionoftheallocation(10+11)andthetotalreturmontheICEBofA10+YearUSTreasuryIndexfortheTreasuryportion(6). Inthisframeworkweassumethattheallocationweightsarekeptconstantfromthelastinformationavailableandcalculatethemonthlyandquarterlyrebalancingneedsbased allocation.Becausetherearecleartrendsinallocationweightsovertime,wecorrectthe 2USRatesWatch128October2022