(Bloomberg) -- The tax overhaul may cause a snag fordebt-hungry pension funds.

Now being refined by the House and Senate, the legislation willlikely encourage companies to bring earnings that have been parkedoverseas back to the U.S.

With all that extra cash, firms may borrow less, reducing thesupply of investment-grade bonds by as much as 17 percent nextyear, according to Bank of America Corp. estimates.

Corporate pension funds have been increasing theirallocations to bonds in the last few years as a way of minimizingvolatility.

The firms continue to move out of riskier investments in favor of debt, expandingtheir holdings to $877.5 billion at the end of the thirdquarter, according to Federal Reserve data. That’s up from$774.2 billion at the end of 2012.

Corporate tax code changes could give companies "greater accessto foreign cash, so maybe they don’t have to issue as many bonds,"said Mike Moran, a pension strategist at Goldman Sachs Group Inc.’sasset management arm.

A decrease in bonds "could potentially present an issue" forcompanies that want to buy more fixed-income assets, he said.

Plans affiliated with S&P 500 companies held about 44percent in debt last year and 35 percent in equities, according toGoldman Sachs.

Pension funds are pushing into debt for several reasons. Someare working to better match assets with liabilities, a move thattends to favor safer, fixed-income investments over equities,especially corporate bonds.

And companies are expected to transfer about $19 billion ofpensions to insurers this year, which often have debt-dominatedbooks.

Road block

“It almost feels like you can’t open the newspaper or lookonline without seeing a headline around somebody” looking todecrease risk, said Matt Herrmann, who leads the retirement riskmanagement group at Willis Towers Watson Plc. “It’s been a veryactive market.”

But the tax overhaul may create a road block. Companies soldabout $1.35 trillion of investment-grade bonds in2016 and $1.42 trillion so far this year, according to datacompiled by Bloomberg. If the proposed tax changes are made intolaw, supply could be down 17 percent to $1.18 trillion next year,according to Hans Mikkelsen, head of U.S. high grade strategy atBank of America. Morgan Stanley analysts expect issuance to decline3 percent.

More investors bidding on a smaller pile of debt is likely topush up prices, leaving lower yields for pension plans that are indire need of higher returns. Spreads on corporate bonds have fallento the lowest in about a decade, according to Bloomberg Barclaysindex data.

Other changes

The new tax code may make it easier forcompanies to repatriate money, but that doesn’t meanthey’ll bring all of their overseas funds back to the U.S. Andfirms known for their large cash piles, including Apple Inc. andMicrosoft Corp., are borrowing anyway.

Other policy changes could give pensions a boost. More laxanti-trust enforcement might fuel more mergers and acquisitions,according to Morgan Stanley analysts led by Adam Richmond.Those transactions often require bond issuance.

"Deal activity will pick up on the back of clarity about taxreform, as well as an overall lighter regulatory environment,"Richmond said in a Nov. 27 report.

Pensions could also benefit from the changes in tax policy ifnewly cash-rich companies put some of their extra money intocorporate plans, Moran said. But that would fuel a cycle,further increasing the appetite for debt among investors competingfor longer-term fixed-income assets.

That growing need for debt is creating "a realchallenge, in particular for the pension industry," said RichSega, chief investment officer at Conning. It’s getting harder tofind enough supply to sustain the broader population of people whotypically trade riskier assets for bonds as they age, he said.

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