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Hedged long corporate bond approach may provide pension funds with better opportunities than core strategy, says Standish

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A long corporate cash bond strategy coupled with tactics to synthetically protect bond values from higher interest rates might be a better strategy for pension plan sponsors than traditional core bond strategies that currently are in place, according to Standish, the Boston-based fixed income specialist for BNY Mellon.

 
Andrew Catalan, managing director of liability driven investing (LDI) strategies for Standish, made the comments to clients, consultants and other investment professionals during a webcast.
 
Many pension funds are invested in core bond strategies benchmarked against the Barclays US Aggregate Bond Index, which includes Treasury securities, US government agency bonds, mortgaged-backed bonds, corporate bonds and a small amount of foreign bonds traded in the US.
 
A continuing rise in interest rates could cause core strategies to underperform a hedged corporate bond strategy, Standish investment professionals said during the webcast. However, Catalan says: "We are concerned that a massive move into long corporate bonds could spark tightening spreads resulting from the scarcity of these securities."
 
"Plan sponsors are benefiting from improved funded status as interest rates have increased and equity markets have rallied this year," says David Leduc, chief investment officer of Standish, and another presenter at the webcast. "Rates have finally moved to the low end of our fair value estimate and the increased volatility has opened up opportunities across fixed income markets."

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