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The Curve Gets Even More Conundrum-ed

Thursday, June 09, 2005 | 06:26 AM

in Economy | Fixed Income/Interest Rates

The Penobscot Princess (having bolted Bear Stearns, but still running in stealth mode) graces us once again with her elegant prose:

Pension Benefit Guaranty Corporation (PBGC) posted the latest on the sorry state of affairs, signaling that US pension funds were underfunded by the egregious amount of $354 billion at the end of ’04. Compare to ’03 when the shortfall stood at $279 bil. (I guess this is what happens when corporations seize upon the advantage of lax reporting rules, but that’s another day, another story. Still, just the thought of this big, gaping hole, should give you the Willies.)

Look: The number of pension plans that are more than $50 million short of promised benefit levels rose from 221 in 2000 to 1,108 in 2004. Those funds have an average of just 69 percent of promised benefits on hand. Nice, eh?

Anyhow, the better point to be made from this latest charmer is the front running-inducing nature of the report. Think the need by pension funds to buy duration, then. Now think of all the fast money understanding this in a flash and taking the opportunity to “get involved” in the parade.

It never ends, does it?

In other words, underfunded pensions have to buy long bonds. But hedge funds know this, and they "front run." That's even more buyers (on top of China and Japan) helping to drive rates lower . . .

UPDATE: June 9 2005 7:15am

The WSJ has also noticed the story -- but its not the PBGC's deficit that should have us worried; Its the half a trillion in obligations that should be scaring us . . .

>
Pension Agency's Gap Is Expected To Balloon to $71 Billion in Decade
MICHAEL SCHROEDER
THE WALL STREET JOURNAL, June 9, 2005; Page A4
http://online.wsj.com/article/0,,SB111828372703055067,00.html