AXA IM’s Barometer – The Great Dutch Bond Billions Rotation

The Dutch pension industry is the fourth largest in the world and it is about to become a €1.7 trillion building site, moving from a regulatory-driven framework in the Great Rotation to an economically-driven one. The pension funds will shift from defined benefit to defined contribution structures and naturally, because today they’re in DB schemes in a regulatory -based system, a large part of that portfolio, roughly €560 billion, is being allocated to government bonds, with a much smaller  proportion (€230 billion) allocated to credit bonds. Going forward, we expect that allocation to sovereign debt to halve -- and to credits to double -- with the transition to an economic system

In order to help Dutch pension funds navigate the road to the new DC system and the corresponding Great Rotation within their fixed income portfolios, AXA IM had launched an easy to understand ‘Bond Performance Barometer’ infographic, which will be published on a quarterly basis together with analytical commentary. The barometer indicates the relative ‘weather,’ or return spread, for institutional investors allocating between government bonds or corporate bonds of the same credit rating.

Under ‘Big Bang’ reforms to be implemented from 2026, the pension funds have the option, to be decided two years prior to the deadline for the new system, to move from defined benefit schemes based on a pooled risk ‘regulatory framework’ focused on funding ratios, to defined contribution schemes focused on an ‘economic framework’ and the individual’s returns from investment markets.

Projecting from the experience of the UK pension market’s transition from DB to largely DC schemes, where institutional allocations to corporate bonds are proportionally nearly twice as high compared with their counterparts in the Netherlands, it is AXA IM’s view that the Dutch funds will choose to unshackle themselves from an overwhelming dependence on returns from ultra-low, or negative-yielding, government bonds. That could mean institutional allocations to ‘govies’ halving from current levels, where the Dutch account for roughly 10% of the total face value of outstanding European government debt of €6.4 trillion, and holdings of corporate credits doubling, with maybe as much as €300 billion in additional investments in this fixed income asset class.

Chris Iggo said the seismic shift in Dutch institutional investment allocations also had to be viewed against the background of the possible end phase in the 40-year bull market in bonds, after the huge buying spree by central banks during the Covid-19 pandemic is gradually pared back as economies recover.  But this market bottoming out won’t necessarily lead to a bond bear market and any rise in volatility would bring investment opportunities, he added.

Johann Plé said the sheer depth and liquidity of the European government bond market meant it would probably absorb the reduced investment from the Dutch, although the impact could be felt at the very long end of the curve where issuance is much thinner and the Dutch pension funds represent a large proportion of total institutional buying. In corporate credits the asset rotation could lead to increased issuance of longer duration bonds to meet the additional demand, he noted.

The journey towards the ‘new look’ Dutch pension portfolios will need to evolve well ahead of the deadline in five years and is going to be tricky to navigate. So we have launched the AXA IM Bond Performance Barometer (ABPB) allowing pension managers to gauge the ‘weather’ in fixed income markets in a quick and easily digestible infographic accompanied by analysis from our fixed income experts on a quarterly basis.

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