Funds raise exposure to long-dated bonds A new year rotation out of US equities into long-dated bonds is being driven by pension plans locking in their big gains from stocks over the past 12 months and taking advantage of much higher yields. This type of positioning between equities and long-dated bonds received a further boost at the end of last week following a tepid US jobs report that may delay the Federal Reserve's retreat from buying bonds under its quantitative easing policy. It also suggests that a broader rotation out of US fixed income into equities as the central bank reduces its current monthly buying of $75bn in bonds does not loom in the near term. So far this year, the S&P 500 has slipped 0.3 per cent this month after it registered a total return of 32 per cent last year. In contrast the Barclays index for long-dated Treasury bonds is up more than 1.2 per cent this month after a total return of minus 13 per cent as the yield on 10-year notes, which move inversely to price, nearly doubled last year, rising to a level last seen in July 2011. After last year's massive rally for stocks, pension plans are better funded and are looking to lock in their gains as bond yields have risen sharply over the past 12 months and now offer better value. With US annual core inflation running just above 1 per cent, a near 4 per cent yield for US 30-year bonds at the start of the year has proven very attractive for pension plans and other long-term investors. "The run-up in equity prices helped pension plans get closer to being fully funded and now some are looking to de-risk their portfolios by locking in rates that have nearly doubled over the past year," said Russ Koesterich, chief investment strategist at BlackRock. It's a rebalancing trend that may continue during the first three months of the year. Last week's sale of $13bn 30-year Treasury bonds attracted robust demand at a yield of 3.899 per cent and subsequently rallied sharply, leaving the yield below 3.80 per cent on Friday. William O'Donnell, strategist at RBS Securities says pension plans in the US have seen their funding rise 21 per cent during 2013 and are now at their highest level since 2007. "One wonders if the great rotation out of bonds and into stocks may reverse a bit this year given the fuller funding levels at private pensions," he said. For pension plans it's the confluence of the rise in equity prices and rise in bond yields over the past year that is behind the move into fixed income. Recent fund flows suggest that is the case, with money entering US long-term government and corporate bond funds hitting eight and 35-week peaks respectively, according to EPFR Global. James Moore, managing director at Pimco, said: "Liability-hedging investors, principally corporate pension plans and life insurers, are buying longer maturity investment-grade credit."