After a brief respite…

With most of the pension world expecting US interest rates to rise, the opposite has occurred and rather dramatically. US 30-year Treasury bond yields have collapsed 51 bps since May 12th, while the US 10-year Treasury note yield is down 41 bps during the same time frame. Since most DB pension plans, especially in the public sector, have liabilities with 10-15 year durations the impact on liabilities and funded ratios has been significant. For instance, a -40 bps move on 10-year duration liabilities = 4% growth, while a similar interest rate change on a 15-year duration liability = 6% growth. The improved funded status that we witnessed earlier this year may prove to be an illusion if asset levels follow a similar path to bond yields. Why subject plan assets to the whims of the markets? Cash flow match a portion of your assets (perhaps your bond allocation) to your plan’s liabilities and secure the promised benefits while eliminating interest rate risk for that portion of the liabilities that are defeased.

4 thoughts on “After a brief respite…

  1. Interesting interest rate behavior, I’d guess driven by a “fear factor”? I personally expect inflation tol increase interest rates sometime in the future.

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