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Pension Rebalancing Has Money Flowing From Stocks to Bonds


The rebalance will likely weigh hurt stocks through Monday.

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The following information is courtesy of Neil Azous at Rareview Macro.

Quarterly Pension Rebalance Calls: Stocks are for sale, and bonds are being bought. Below is commentary on pension rebalancing from three financial institutions.

1. Goldman Sachs (NYSE:GS): For the second quarter of 2014, equities outperformed fixed-income by +3.74%. As a result, quarterly rebalancing flow estimates are -$7.67 billion in equities for sale. Also, for the month of June, the S&P 500 (INDEXSP:.INX) has outperformed US Treasury notes by +3.00%. The S&P 500 total return has returned +2.16%, and the 10-year total return has been -0.84%. This results in monthly estimated rebalancing flow of -$6.30 billion of equities for sale. Goldman Sachs saw one "trigger" event on June 9, with equities cumulatively outperforming fixed income by a 6% spread up to that date, leading to a net -$10.88 billion of equities for sale. Note that Goldman's assumption is that trigger rebalancing occurs at or around the time of event.

2. UBS AG (NYSE:UBS): As has been the norm in the QE era, UBS expects US pensions to sell stocks and buy bonds during the second quarter quarter-end portfolio rebalancing. UBS's model projects a moderate $19 to $22 billion of equity sales versus just under $10 billion of bond purchases. Furthermore, within equity portfolios, UBS sees the bulk of trimming ($12 to $15 billion) in US large cap stocks. Small cap, developed markets, and emerging market portfolios should see only marginal flows. On the fixed income side, UBS expects rebalancing purchases to affect mostly five to 10-year maturities. The 10-year area should outperform cash while flows are going through.

3. Societe Generale SA (EPA:GLE): The S&P 500 index has outperformed 10-year Treasuries by 3% month to date and 3.7% quarter to date. SocGen's model estimates $20 billion in equity-selling and bond-buying pension rebalancing demand at month end. The model also estimated there was about $17 billion in equity-buying and bond-selling market flow during the equity market rally this month.

I think this will weigh on equities through this coming Monday.

Twitter: @MichaelSedacca

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