Companies busy selling bonds to plug pension deficits

By John Detrixhe
Bloomberg News

Companies facing the biggest pension deficit since at least 1994 are selling bonds at the fastest pace in more than seven years to plug the hole, betting that future returns will exceed their borrowing costs.

United Parcel Service, Dow Chemical, Northrop Grumman and PPG sold at least $5.25 billion of investment-grade U.S. corporate bonds in November to fund their pensions, making it the busiest month since June 2003, according to data compiled by Bloomberg.

The Federal Reserve’s effort to hold down interest rates to stimulate the economy has caused corporate pension obligations, which are pegged to bond yields, to rise by $105.8 billion this year to $1.44 trillion as of October, according to Milliman. Now, companies are taking advantage of borrowing costs at about the lowest on record as interest rates are expected to rise as the global economy recovers.

“They’re fighting fire with fire,” John Lonski, chief economist at Moody’s Capital Markets Group in New York, said in a telephone interview. “They’re being victimized by low bond yields, so why not go ahead and use them as an offset?”

Investment-grade corporate bond yields, used as a benchmark to determine future corporate liabilities to retirees, fell to 3.53 percent on Nov. 4, the lowest ever, Bank of America Merrill Lynch index data show.

Corporate pensions in the Standard & Poor’s 500 Index with about $1 trillion in assets are 77 percent funded this year, down from 82 percent at the end of 2009, Bank of America Merrill Lynch said in an Oct. 29 report.

Read more: Companies busy selling bonds to plug pension deficits – The Denver Post
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