Stripping Activity Up

Please get your mind out of the gutter.  The stripping activity to which we refer relates to the stripping of U.S. Treasury bonds, and it may be an indication that asset/liability management (ALM) is on the rise, particularly with regard to private pension plans. It is good to see, although we still prefer to use a cash-matching defeasance strategy to implement our risk-reducing pension management process focusing on near-term retired lives as opposed to a duration targeted approach. Furthermore, this shouldn’t only be the focus of private pension systems, as we believe that ALL public, private and multiemployer plans should be focused on providing the promised benefit at the lowest cost and they should be de-risking as they move toward full-funding.

The following information was received from J.P. Morgan.

May STRIPS update

Today Treasury released its Monthly Statement of the Public Debt (MSPD) for May, which showed P-STRIPS outstanding increased $5.9bn over the month, the third consecutive month of $5+bn. Over the first five months of the year, P-STRIPS outstanding has increased by $21.7bn, leaving us on pace for close to $52bn in 2018, after a record of $28.2bn in 2017 (Exhibit 3). This demand is clearly being driven by the sharp increase in the average funded ratio at the top 100 defined benefit pension funds, which has increased 8%-pts over the past year and risen to 91.5%, the highest level since October 2008 (Exhibit 4). Along the curve, the bulk of the activity was concentrated in the 28- to 30-year sector, which saw $8.7bn in stripping over the month, well above the prior 6-month average of $5bn, and the single largest month of demand for long STRIPS on record.

The source is the U.S. Treasury

2018 data is through May 31st, and it is not annualized.

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