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Biggest Thai pension fund shifts to stocks as bond yields slide

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(Bloomberg) — Thailand’s biggest pension fund plans to shift some of its 77 percent investment in bonds to stocks as a slide in yields erodes returns for its 14 million members.

The Social Security Office,which invests part of its $39.2 billion in government bonds and those of state enterprises and private companies, will switch to more “risky” assets upon approval from the board of directors, Chompoopen Sirithorn, its Bangkok-based head of investments, said in an interview. The yield on the 2040 sovereign debt, among the longer-maturities favored by pension funds and insurers, has plunged to 3.2 percent compared with a six-year average of 4.18 percent, Thai Bond Market Association data show.

Global financial turmoil has pushed up demand for the relative safety of fixed-income securities, with investors in Europe and Japan now having to stomach negative yields as central banks ease monetary policy to stimulate growth. The Federal Reserve’s delay in adding to its first interest-rate increase in more than a decade, a tepid economic recovery and weak oil prices will keep bond returns at an “extremely low level for some time,” Chompoopen said.

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“We have to urgently revise our investment strategy otherwise the existing returns will be insufficient for retirement payments of our members,” she said by phone Tuesday. “Bond yields have fallen so fast and to a level that is much lower than we had imagined.”

The SSO is following Japan’s Government Pension Investment Fund in lowering domestic bond holdings and switching into stocks. Such a strategy comes with its own risks when almost $7 trillion has already been wiped off the value of global equities this year. The MSCI World Index of shares has lost 8.6 percent in 2016, while Thailand’s SET Index is down 0.4 percent.

Thailand’s shorter-maturity bonds such as the 10-year are following the same trend as longer-dated notes, with the yield falling 46 basis points this year to 2.06 percent. It dropped to 1.98 percent last week, the lowest level since at least 2010, data compiled by Bloomberg show.

“It’s the global sentiment of risk-off and the flight to safety,” Chompoopen said. “In addition, the cash liquidity in the domestic system is also extremely large as slow economic growth has flushed domestic financial institutions with surplus cash that can’t be lent or invested. So they park the excess in bonds.”

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