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Dutch pension funds are set to place strain on European authorities bond markets later this 12 months as they begin to promote round €125bn of long-dated bonds due to a considerable reform of the retirement sector.
Between 2025 and 2028 the €1.5tn Dutch pension trade is transitioning from a system wherein remaining payouts to pensioners are assured to an outlined contribution framework, wherein employers are solely tied to the quantity they put in. That may imply holding a lot much less long-term sovereign debt to again their long-term guarantees and releasing up extra funds to put money into higher-returning property resembling equities and credit score.
Whereas a handful have already switched, Dutch funds managing near half of the overall property that must be transferred are set to transform in January subsequent 12 months, with managers anticipated to arrange portfolios within the run-up. Strategists at Dutch financial institution Rabobank anticipate €127bn of long-term sovereign debt shall be bought over the course of the transition.
The sale is the newest instance of declining demand for long-term debt amongst pension funds which, coupled with file ranges of sovereign borrowing, has helped push up bond yields world wide.
“Everyone seems to be nervous concerning the European lengthy finish” of the bond market, mentioned Pooja Kumra, a charges strategist at TD Securities, including that gross sales might come “in a short time on the finish of the 12 months . . . however pre-emptive trades might be punitive if there are extra delays”.
PFZW, the second-largest pension fund within the Netherlands with €259bn of property for healthcare and welfare staff, instructed the Monetary Instances it was on observe to change to the brand new system on January 1, 2026. ABP, the nation’s largest, plans to transition the next 12 months.
Rising bond yields are piling strain on policymakers as Europe will increase its borrowing to fund its defence and vitality ambitions, led by Germany’s €1tn “no matter it takes” spending plan.
Lengthy-dated Eurozone debt has been hit particularly arduous. Germany’s 30-year yield has climbed from beneath zero throughout the Covid pandemic to greater than 3 per cent, near its highest ranges for the reason that Eurozone debt disaster. The extra rate of interest paid on France’s 30-year debt, in contrast with its two-year equal, has surged from zero two years in the past to greater than 2 share factors.
Dutch pension funds, that are by far the biggest within the Eurozone, have used rates of interest swaps and authorities bonds throughout totally different time horizons, even over 50 years or extra, to match the interval over which they need to make payouts to their youngest members.
However as funds transfer to a system the place they pay out primarily based on returns, they’re set to maneuver in direction of riskier property resembling equities and credit score, which they anticipate to generate larger returns for his or her members over the long run.
“There shall be a shift away from 50, 40 and 30-year bonds,” mentioned Michiel Tukker, a European charges strategist at Dutch financial institution ING. “Now the query is . . . who would be the purchaser?”
Another conventional consumers have pulled again. Japanese traders, traditionally a cornerstone purchaser of Eurozone sovereign debt, bought down their holdings on the finish of final 12 months on the quickest tempo in a decade.
Rabobank estimates that, previous to the debt gross sales, Dutch pension funds owned round €457bn of presidency bonds, with the heaviest gross sales — an estimated mixed €69bn — anticipated in German, French and Dutch sovereign debt.
Some 19 per cent of all authorities debt within the Netherlands is owned by Dutch retirement funds, in contrast with an 8 per cent possession of German Bunds, in line with Rabobank, with the possession ratio highest for bonds with a distant maturity date.
Main into the pension transition, Dutch funds have been growing their use of hedging via bonds and swaps to guard their members’ advantages ratio from any rate of interest shock or fairness market tumble.
“It offers a tough dynamic, the place on the one hand you might be incentivised to extend your rate of interest hedges going into the transition date, after which after that date you do the alternative commerce as quick as attainable since you don’t need to be the final one,” mentioned Tukker.
The timing remains to be unsure. A handful of pension funds have already delayed their transition date, together with PME, a €60bn scheme for staff within the metallic and tech trade. However hedge funds are positioning to revenue from the transition, analysts mentioned.
“Everyone seems to be attempting to prey on this,” mentioned Lyn Graham-Taylor, a senior charges strategist at Rabobank, including that he was centered on attempting to work out “how a lot are long-end charges going to steepen and the way a lot is already within the worth?”
Further reporting by Ian Smith
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