Again, markets seem surprised by weak economic releases for retail sales and inflation. WHY? It seems that every economic statistic released in the last 1-2 months has proven to be below expectations. Were these expectations too rosy? Given extremely weak first quarter results, should market participants have been this bullish?
The unfortunate aspect of these inflated expectations is the fact that US pension consultants continue to recommend to their clients a significant underweighting in US fixed income product. This underweight continues to exacerbate the asset/liability mismatch that has existed since US interest rates fell below the ROA roughly 15 years ago.
As we’ve said on numerous occasions, managing a DB plan is not about generating the highest return, but meeting the promised benefits at the lowest cost. We are one bear market away from the complete devastation of the public DB system. These plans need to be de-risked now, so that funded status and contribution expense can be stabilized before it is too late.
By the way, US 10-year Treasury yields are once again plummeting, as the bonds are up 23/32nds and it currently yields 2.13%. So much for rising rates!