A key source of demand for corporate bonds may be fading now that managers of company pension funds have more than enough money on hand to pay their retirees.
Company-sponsored plans that had struggled in past years to keep up with their obligations in an era of low interest rates have gotten a boost from a decade of strong equity returns. Many plowed those gains into bonds in more recent years as yields rose. The trade allowed managers to lock in funding for retirees and cut risk at the same time.
Now they’ve lowered risk enough that they have less incentive to boost bond allocations.
“Pension plans have been on this de-risking journey,” said Matt McDaniel, US defined benefit investment leader at Mercer, the pension consulting service. “That’s been a macro trend for well over a decade now; what we’re seeing more recently, though, is more and more plan sponsors getting to the end of that path.”
Corporate pensions collectively have around 108% of the funding they need as of late April, according to the Milliman 100 Pension Funding Index, the highest funding ratio since October 2007. The plans have maintained fully funded status for four consecutive years since 2022. That’s the longest such stretch this century, according to data from Goldman Sachs Asset Management.
The impact may already be showing up in allocations, which show corporate pensions apparently have stopped selling stocks en masse, and some have even cut fixed-income allocations slightly. Their exposure to public equities has been stable at 25% for the past three years after two decades of declines. Meanwhile, fixed-income allocations have fallen to 52% in 2024 and 2025, compared with 54% in 2023, GSAM’s data showed.
“You’ll still see some benefit on the demand for credit, but it will certainly be a smaller tailwind,” said Rick Ratkowski, director of investment strategies at NISA Investment Advisors, which specializes in fixed-income investing for large institutions.
Big Borrowers
Any slackening in demand comes as companies’ borrowing needs remain high. US high-grade corporate bond sales have climbed 24% to $949 billion this year. The biggest tech companies are borrowing hundreds of billions of dollars to fund outsize investments in data centers and other artificial intelligence infrastructure.
Corporate pensions control more than $3 trillion of assets, and even slight changes in their incentives can have a significant impact on markets. For now, the spread between interest rates on US corporate bonds and Treasuries has been hovering near the lowest level in decades.
Even if company pensions have less incentive to stock up on corporate debt, there are plenty of other sources of demand. US public pension funds, for state and local government employees, collectively remained underfunded last year at about 82.5% of their obligations, leaving them short by about $1.27 trillion. They aren’t yet in a position to scale back on corporate bond allocations. And insurers are selling hundreds of billions of dollars of annuities to retirees seeking income, products that are often built in part by bundling up corporate bonds.
But for years, corporate pensions have been a key force in corporate bond purchasing. The pensions were just 82% funded in July 2020, according to Milliman data. As they notched more and more gains from stocks, they had an incentive to cut their risk by selling stocks and buying bonds whose projected income can be closely matched to their future liabilities to retirees.
The trade left them less exposed to fluctuations in markets, by generating cash flows that can be more or less matched to payments to retirees. The bonds they bought were often high-grade company notes, which have low default rates and pay more than Treasuries.
That’s giving them leeway to take some risk, said Todd Castagno, Morgan Stanley’s head of global valuation, accounting and tax research.
“The complete academic rational view is you would completely hedge out your interest rate risk with fixed income and maybe some alternatives and a little bit of equity,” Castagno said. “But the reality is a lot of these companies are still pretty heavily equity focused.”
Michael Moran, senior pension strategist at Goldman Sachs Asset Management, expects continued de-risking but at a slow pace.
The industry is entering a more customized phase of liability-driven investing, he said. While earlier stages focused on adding duration and raising fixed-income allocations, better-funded plans are now tinkering at the margins to more precisely match their holdings with their obligations.
Also, while current regulations and tax rules discourage plan sponsors from accessing surplus assets, employer groups are pushing for looser rules that might allow them to use the extra cash for their own corporate purposes. In a hot equity market, this could dampen enthusiasm for fixed income in favor of holdings that offer the prospect of bigger returns.
“Some plans would probably rethink their asset allocation and investment strategy and that would probably imply less de-risking,” Moran said.
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