Traditional advice suggests that expectations for rising interest rates would spur a shift to short-duration bonds, but some analysts believe long-duration bonds may be the better bet.
"Average investors do not look beyond the 10-year," Nizam Idris, head of strategy for fixed income at Macquarie said in a phone interview. "It's more the asset class that pension funds are interested in" as they need to match assets to liabilities, he said.
But pension funds' need to extend their duration is a global trend, set to keep long-end bonds supported, he said. At the same time, any increase in short-term interest rates could weigh on longer-term growth and inflation expectations, pushing down yields on the long end, he said. Bond yields move inversely to prices.
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Morgan Stanley also expects pension flows will provide a long-term support for long-duration bond markets.
"Long-duration fixed income stands to benefit in the long run from de-risking and asset liability duration matching," it said in a note last week.