Today’s employment news should send shivers through the DB pension community! Expectations (hope?) of an interest rate rise in June / July have been thwarted, as the U.S. economy added only 38,000 jobs in May. UGH! Worse, the Labor Participation Rate fell 0.2% to 62.6% matching December 2015. In addition, March and April employment gains were revised down by 59,000. We haven’t seen a jobs report this weak since September 2010.
Fed Chairwoman Janet Yellen said a week ago that an increase in short-term interest rates would be appropriate “probably in the coming months” if the economy continues its upward trajectory. The strength of the labor market plays an important role in the Fed’s decision to adjust interest rates, alongside inflation and economic growth, which remain muted.
Well, it is highly unlikely that we will see a rate rise in June or July given this jobs report. For plan sponsors that were hoping to see a rate rise, which would reduce the present value of their plan’s liabilities (corporate plans under FASB), they will have to continue to live with very low rates. The U.S 10-year Treasury Bond has rallied 28/32nds on this news and the yield is at 1.705%.
For our retail clients, the low interest rate environment continues to constrain their returns from a moderate to conservative asset allocation profile, forcing many to eat prematurely into their principal or causing them to seek more aggressive (risky) investments to create some additional yield (HY, bank loans, etc.).
We have some ideas on how to navigate your portfolio in this environment. Don’t hesitate to reach out to us if you think that we can help you.