Amazingly, bond yields are plummeting for US debt. The 10 year yield is at 1.96% this morning, having closed at 2.52% on 9/30/14. We have been stressing to plan sponsors throughout the last two years that they convert their fixed income exposure into a beta portfolio, and to get away from forecasting rates. As you know, most fixed income analysts were calling for higher rates at the beginning of the year. We, at KCS, have been calling for falling rates. But, we also stressed that we didn’t want to be in the interest forecasting game either.

Our strategy is to create a beta portfolio that cash matches near-term liabilities.  With this approach,we remove interest rate sensitivity, improve liquidity, extend the investing horizon for the alpha assets, and begin to de-risk the plan through a glide path to full funding.  The beta / alpha portfolio would have stabilized the asset / liability mismatch found in most DB plans, while helping plans avoid the chase for yield, by dipping down in quality in the high yield and bank loan segments, which have come under a ton of pressure.

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