Funded Ratios Under Renewed Pressure

The following is courtesy of Mark Grant and the FT:

(FT) The escalating trade fight between the US and its allies sent investors scurrying for the relative safety of government debt and pushed the difference between short- and long-dated bonds to its flattest level since mid-2007.

The yield on the benchmark 10-year US Treasury was down 2.7 basis points at 2.873 percent, while that on the more policy-sensitive two-year Treasury was down 2.1 bps at 2.5287 percent. Bond prices rise as yields fall.

That pushed the difference between the two Treasuries to 34.242 bps, which is the flattest level for the so-called yield curve since late August 2007.

At a low of 33.411 basis points earlier this morning, it was the narrowest the gap had been on an intraday basis since August 31 of that year.

While not there yet, an inverted yield curve, where short-term yields trade above their long-term counterparts, is typically seen as a strong predictor of economic recession.

Couple declining long-term interest rates with a U.S. equity market that has fallen in 8 of the past 9 trading sessions (and today is ugly, too), and you have a combination of inputs that don’t support improvement in defined benefit funded ratios when marking both assets (always done) and liabilities (rarely done) to market.

Many corporate plans have already de-risked by managing their assets to the plan’s liabilities. Unfortunately, Public and Multiemployer plans have, for the most part, not engaged in this activity preferring to focus on the ROA as their plan’s primary objective.

I would much prefer (if I were a plan sponsor) to know that my near-term “promise” to my beneficiaries has been taken care of which buys time for the remaining assets to fund future liabilities. Volatility will always be a part of pension management but putting into place a de-risking strategy helps both the plan sponsor and beneficiary sleep well at night knowing that the assets are already set aside for the next benefit payment.

 

 

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