The U.S. 10-Year Treasury Yield Flatlined in 2017

For most plan sponsors and their asset consultants, the return on asset assumption (ROA) drives investment structure and asset allocation decisions.  As U.S. interest rates fell during most of the last 35 years, pension plan exposure to fixed income has fallen to record low allocations.  Yet, a plan’s liabilities (the promise) are highly correlated to interest rates.  The diminished exposure has created a huge mismatch between assets and liabilities.

For years, most industry participants have fully expected growth, inflation, and higher U.S. rates. Well, we’ve seen short-term rates rise during the last 15+ months, but longer rates, such as the U.S. 10-year Treasury, have been in a period of relative calm.  In fact, yields on the 10-year have actually fallen by about 3-4 basis points in 2017, much to the dismay of many market forecasters.

For regular readers of the KCS blog and Fireside Chat series, you may recall that in March 2017 we reissued a Fireside Chat that we had produced back in 2013 on why we didn’t see U.S. long rates rising much in the near future.  Our interest in reproducing this piece was our feeling that 2017 would not be the year that longer rates would spike, and they haven’t.

As equity markets continue to move forward with little concern for valuation, plan sponsors should begin to reallocate their asset class exposures back to long-term policy normal levels.  In doing so, they should consider adopting a cashflow-matching strategy for their fixed income exposure to mirror monthly benefit payments for the plan’s retired lives.  We’d certainly welcome the opportunity to discuss the appropriateness of this strategy.

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