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Inside Investment: Pension de-risking is a risky business

Pension funds are slashing their allocations to equities and reorienting their portfolios to more accurately match liabilities. Strategically that makes sense. Tactically it smacks of buying at the top and it is already creating distortions in markets.

Last month Mexico issued $1 billion of 100-year bonds, the biggest century deal ever and the first from a Latin American issuer. On average, on every day since, more than 100 Mexicans have been arrested and 30 killed in the long-running military campaign against drug cartels. The country’s late 19th-century, early 20th-century president, Porfirio Diaz, famously commented that "poor Mexico" was "so far from God and so close to the United States". This was not previously thought to be a prophecy on bond yields, although the century bond trades at just a 235 basis point premium to 30-year US treasuries. Diaz defined Mexican politics for three decades. He was ousted in a revolution in 1911 and died in exile in Paris. Mexican bondholders over the past century have endured similarly mixed fortunes. The country defaulted in 1982 and needed a US-coordinated bailout in 1994. Mexico is far from being the only sovereign creditor whose bonds seem expensive. The 2030 issue from the Republic of Philippines, scene of two revolutions since 1985, yields a little over 5%. The 10-year government bonds of the UK and the US, two countries that are no strangers to bouts of inflation intermixed with currency devaluation, yield less than 3%.