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WHY DOES BOND DOWNGRADES REQUIRE DIVESTURES BY PENSION FUNDS AND INSURANCE COMPANIES
The issuer of a security must ensure that its securities are owned by qualified institutional buyers (QIBs), which are defined as institutions that have $100 million or more in assets under management Furthermore, the issuer must ensure that at least half of the securities are held by QIBs
https://www.investopedia.com/terms/q/qib.asp
While a pension fund and insurance companies are not QIBs, they are not prohibited from owning the bonds However, if the issuer does not have at least 50% of its bonds owned by QIBs, it risks the downgrade of the bonds by the rating agency
When pension funds buy bonds to rebalance their portfolio yields drop and likewise when they sell bonds yields climb. Falling yields bring in investors buying growth stock chasing profits. Pension funds hold about 125 billion dollars of bonds.
https://www.cnbc.com/amp/2021/03/23/pension-funds-have-to-buy-bonds-to-rebalance-portfolios-and-that-might-be-good-for-stocks.html
WHAT ARE THE BENEFITS OF PENSION FUNDS AND INSURANCE COMPANIES OWNING BONDS?
Pension funds and insurance companies are motivated to take on the risk inherent in bond investments because their clients financial needs are best served by investments that are a stable, reliable, and predictable source of income By investing in bonds, pension funds and insurance companies are able to provide their clients with a predictable stream of income
In addition, pension funds and insurance companies are more able to stomach the risk of bond investments because they typically have a long-term investment horizon, which allows them to weather short-term fluctuations in the value of their investment in bonds Furthermore, because they are non-profit entities, they are not driven to maximize their profits
Pension funds and insurance companies are better positioned than individual investors to purchase bonds that are rated below investment grade This is because these investors are able to purchase these bonds through the pooled investment funds that they manage These pooled investments funds can purchase bonds with ratings that are one or two levels below investment grade because such bonds are typically available at a steep discount Individual investors generally do not have access to such discounted bonds because they lack the access to the pooled investment funds that pension funds and insurance companies have
WHAT ARE THE DRAWBACKS OF PENSION FUNDS AND INSURANCE COMPANIES OWNING BONDS?
Pension funds and insurance companies have to maintain a certain level of liquidity in order to pay their beneficiaries As a result, they typically invest in bonds that mature either in 40 or more years or in fewer than 10 years
Real estate investments are typically illiquid They are often held for a long period of time and are seldom sold This lack of liquidity may make it difficult for pension funds and insurance companies
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By David Nishimoto
3.1
1717 ratings
The issuer of a security must ensure that its securities are owned by qualified institutional buyers (QIBs), which are defined as institutions that have $100 million or more in assets under management Furthermore, the issuer must ensure that at least half of the securities are held by QIBs
https://www.investopedia.com/terms/q/qib.asp
While a pension fund and insurance companies are not QIBs, they are not prohibited from owning the bonds However, if the issuer does not have at least 50% of its bonds owned by QIBs, it risks the downgrade of the bonds by the rating agency
When pension funds buy bonds to rebalance their portfolio yields drop and likewise when they sell bonds yields climb. Falling yields bring in investors buying growth stock chasing profits. Pension funds hold about 125 billion dollars of bonds.
https://www.cnbc.com/amp/2021/03/23/pension-funds-have-to-buy-bonds-to-rebalance-portfolios-and-that-might-be-good-for-stocks.html
WHAT ARE THE BENEFITS OF PENSION FUNDS AND INSURANCE COMPANIES OWNING BONDS?
Pension funds and insurance companies are motivated to take on the risk inherent in bond investments because their clients financial needs are best served by investments that are a stable, reliable, and predictable source of income By investing in bonds, pension funds and insurance companies are able to provide their clients with a predictable stream of income
In addition, pension funds and insurance companies are more able to stomach the risk of bond investments because they typically have a long-term investment horizon, which allows them to weather short-term fluctuations in the value of their investment in bonds Furthermore, because they are non-profit entities, they are not driven to maximize their profits
Pension funds and insurance companies are better positioned than individual investors to purchase bonds that are rated below investment grade This is because these investors are able to purchase these bonds through the pooled investment funds that they manage These pooled investments funds can purchase bonds with ratings that are one or two levels below investment grade because such bonds are typically available at a steep discount Individual investors generally do not have access to such discounted bonds because they lack the access to the pooled investment funds that pension funds and insurance companies have
WHAT ARE THE DRAWBACKS OF PENSION FUNDS AND INSURANCE COMPANIES OWNING BONDS?
Pension funds and insurance companies have to maintain a certain level of liquidity in order to pay their beneficiaries As a result, they typically invest in bonds that mature either in 40 or more years or in fewer than 10 years
Real estate investments are typically illiquid They are often held for a long period of time and are seldom sold This lack of liquidity may make it difficult for pension funds and insurance companies