Bonds are Getting More Attractive

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

At Ryan ALM, Inc., we love bonds because of their cash flows, carefully matching those principal and interest payments with a pension plan’s unique liability cash flows (benefits). Importantly, one doesn’t have to give up much these days in terms of potential return relative to other asset classes for those consultants and plan sponsors not inclined to defease pension liabilities. A glance at the chart below quickly highlights the unattractiveness of equities relative to the US 3-month T-Bill, which is currently yielding 4.78% as of 4 pm today. The S&P 500 Earnings Yield (Earnings/Price) is at a 21-year low versus the yield of the 3-month T-Bill. Equities haven’t been this unattractive since roughly 2000, and we know what happened to stocks during the next few years.

We have been espousing cash flow matching (CFM) as a strategy since the firm’s inception in 2004. However, for much of the time since then US interest rates trended lower eventually hitting all-time low levels during the initial Covid-19 onslaught. Given today’s inflationary environment and the Federal Reserve’s aggressive policy action, US interest rates are trending higher and will likely continue on that path for some time. At Ryan ALM, we are constructing investment-grade bond portfolios used to defease pension liabilities with yields in the mid-5 % range. Plan sponsors can SECURE their pension liabilities with little volatility and capture a big chunk of the annual ROA target without suffering FOMO from not being invested in a total return fixed income strategy or US equities. Isn’t time to explore risk reduction strategies before the markets make securing your promised benefits more challenging?

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