On January 9th, and again on April 4th, we at KCS addressed the issue that US interest rates wouldn’t necessarily rise, and in fact, with everyone in the world seemingly believing that interest rates had only one way to move – UP – we thought that there was a good chance that rates might fall. In fact, the interest rate on the 10 year US Treasury has fallen by more than 30 bps so far this year. That is a fairly meaningful move. With many plan sponsors and asset consultants trimming, eliminating, and restructuring their US fixed income exposure, a plan’s asset allocation is now more disconnected from the liabilities than before. This disconnect exacerbates the volatility in funded ratios and contribution costs.
Don’t believe us, then how about the following. Here is a brief research piece that I found on Cullen Roche’s website today.
“Jim Bianco, of Bianco Research, points out in a market comment Tuesday that a survey of 67 economists this month shows every single one of them expects the 10-year Treasury yield to rise in the next six months.
The survey, which is done each month by Bloomberg, has been notably bearish for some time now, with nearly everyone expecting rising rates. In March, 97% expected rising rates. In February, 95% expected yields to climb. And in January, 97% held that expectation. Since the beginning of 2009, there have only been a handful of instances where less than 50% expected rates to rise.”
The US Retirement industry cannot afford to get the direction of rates wrong. A continuation in the decline of rates will only further inflate the underfunding of US pension liabilities, and continue to put pressure on both private and public DB plan sponsors to do something else, such as close or freeze the DB plan and move more participants into DC. At KCS, we’ve spoken and written about alternative strategies that go along way to improving funded ratios and stabilize contribution costs. We are waiting to hear form you.
The beneficiaries of our collective effort cannot afford to have us screw up any more. DC plans are not the answer, but are quickly becoming the only game in town.