Implementing a long duration strategy now may avoid potential future corporate bond scarcity.
Many pension plan sponsors are making decisions on allocation to fixed income based on the funded status of their plan, the absolute level of interest rates and the relative value of other asset classes. They may be overlooking another important component — a potential scarcity of long-dated corporate bonds which could become an important technical factor in the market. Should rates rise and many pension plans seize the opportunity to expand a long-duration program, investors could find themselves crowded out by a sharp rise in demand for long credit.
A better alternative may be to continue with a planned implementation of a long-duration program and make the interest rate exposure a separate and discrete decision. Investors can easily shorten the duration of a plan with an interest rate overlay while maintaining or expanding investments in long credit.
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