Calpers, the largest pension fund in the US by assets, insists that US treasuries remain an attractive and safe proposition for investors, despite the high profile announcement from South Korea’s $220bn (€138bn, £111bn) National Pension Service that it was to stop investing in them because of falling yields.
The California-based pension fund, with assets of $260bn including 40 per cent of its $70bn fixed income asset allocation currently in US government debt, told FT Mandate that treasuries have plenty to offer pension funds, though two-year treasury yields slumped to their lowest level since 2003 recently – at around 1.70 per cent. Yields on two-year treasuries were around 5 per cent in June 2007.
“The ‘unattractiveness’ of US treasuries, in the view of the NPS, lies only in their low yields, which have resulted from the credit crunch and the subprime mortgage problem, as the associated flight to the safety of treasuries and the Federal Reserve’s remedial interest rate cuts have driven yields down sharply,” said a spokesman for Calpers Investments. “The ‘unattractiveness’ is not based on doubts regarding the US ability to service or pay back its debt obligations,” he added.
NPS looking elsewhere
Last month, South Korea’s NPS, the world’s fifth biggest pension fund, ended its 20 year-affair with US treasuries, arguing that the timing was right to decouple exposure. “It is difficult to buy more US treasuries because the portion of our treasury investment is already too big and treasury yields have fallen a lot,” said Kwag Dae-hwan, head of global investments at the NPS. “We need to diversify our portfolio away…and we find asset-backed securities and corporate debt more attractive because of wider credit spreads.”
The NPS holds about $14bn of US government debt, and has $24bn in overseas assets with $7.2bn in foreign equities.
Mr Dae-hwan added: “The Fed continues to cut interest rates. We are still making profits from treasuries that we bought in the past but we think we’d better dispose of them and buy higher-yielding European-government debt.”
But Calpers points to an increase in total holdings of US treasuries by foreigners, up 13 per cent to $2,402bn in January 2008 compared to the same period last year, as a steer that they are continuing to attract inward investment.
“Chinese holdings, in particular, have increased by 22 per cent, in the same period,” noted a spokesman. “Looking at the holdings and sales records, the country data are mixed, but there’s not a clear indication that foreigners have been losing interest in US treasuries,” he said.
South Korea’s holdings of US treasuries have been on the decline since reaching a peak of $72.8bn in February 2006, way before the subprime and credit crunch problem. As of January 2008, South Korea’s holdings of treasuries were $42.1bn.
Other US pension funds match Calpers’ upbeat view on the prospect for US treasuries within their fixed income portfolios. NYSTRS, the $105bn New York teachers’ pension plan, has $5bn in US government notes as part of its 12 per cent fixed income allocation and says it is seeking to increase this amount in the future. Texas Teachers has $9bn in US treasuries, from $30bn allocated to fixed income within its $115 pension plan. The $90bn Wisconsin Retirement System has 80 per cent tied up in US treasuries within its $6bn money market fund, the State Investment Fund.
Europeans underweight
European funds are naturally less biased. For example Stichting Pensioenfonds ABP, the €220 Netherlands pension plan, put around 2.5 per cent in US government debt last year (€2.9bn), though its share was down from the previous 12 months and behind allocations to a number of eurozone debt issuers (see table).
ABP refused to comment on its policy of downplaying US treasury exposure, but told FT Mandate: “Remember that as a pension fund, ABP is a long-term investor, we cannot say what will happen in the short-term”.
ABP’s Strategic Investment Plan for 2007-2009 reveals that exposure to government bonds is set to come down to 10 per cent, from 15 per cent, as part of gradual shift away from fixed income and into alternatives.
Timo Loyttyniemi, head of Finland’s state pension told FT Mandate that its €13bn fund, Ver, has around €5bn in fixed income investments, which are all in Euro-denominated notes and with zero exposure to US government debt. “Our direct fixed income portfolio is European based and there will be no change in our strategy.”
