As we’ve consistently reported, the damage to DB pension systems of falling equities and declining US interest rates is an awful combination that is harming the funded ratios of these plans, which will ultimately impact contribution expenses. But, there is always opportunity during periods of uncertainty. One of the great opportunities at this time is provided within the US bond market.
Long Treasury bonds have produced strong returns during this period of time. Most pension systems still have exposure to fixed income despite the fact many plans and their consultants believe that any fixed income exposure would be a drag on a plan’s ability to achieve the “Holy Grail”. Sorry, I meant ROA. Given the significant positive impact of falling rates on long bonds, it is the opinion of Ryan ALM that plans sell long Treasuries (>10 years) and install a Liability Beta Portfolio (LBP) to meet near-term (1-10 year) Retired Lives Liabilities.
Corporate bonds, both investment grade and high yield, have seen their yields widen considerable versus Treasuries during this period of equity market weakness. As a result, they are providing investors with a significant opportunity to add meaningful yield. The Ryan ALM LBP uses corporate bonds, both IG and HY, where permitted by the plan’s investment policy statement. It is a wonderful time to establish this de-risking strategy, as the benefits are numerous, including: improved liquidity, no interest rate risk, higher yields, and a longer investing horizon for the balance of the portfolio, that could definitely use the time to recoup previous equity valuations. We are happy to work with you on developing such a strategy. Don’t let this “crisis” paralyze you. Take advantage of the significant move in rates to help fortify your plan.