📈 Equity Risk Premium Concerns
You need to understand this.
Pension Funds Buying Bonds
Pension funds are one of the largest players in the market - they currently manage $6 trillion worth of assets - so where they are allocating capital is of extreme significance to retail traders.
Pension funds’ main goals are to beat the rate of inflation and provide stable returns to those that they are investing on the behalf of. Right now, the median investment return assumption for a pension fund is just 7%.
From 2021 to now, you see that return expectations have stabilized. This is a result of pension funds buying bonds as opposed to equities.
As the bond yields rise, pension funds become less incentivized to invest in equities because bonds are providing significant returns at zero risk. Equities are much more risky, and thus are a less attractive investment vehicle for pension funds.
This concept is known as equity risk premium and it is critical to understand.
Bond Yields Rising
This is important for us to understand because right now we are seeing a shift in equity risk premium away from equities and towards bonds.
The ten-year treasure is currently breaking out and offering nearly 4.8% yield.
This means that large players in the market, such as pension funds, are going to increasingly flow their money into the bond market vs. the equity market.
This could put pressure on equities as pension funds sell their equity positions and replace them with bond purchases.
There is a lot more to explain about this and how it will impact the market - I dive deeper into this topic in the clip below: