Kamp on Dakota Live Podcast

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

I was recently provided an opportunity to join Robert Morier and Dan DiDomenico on a Dakota Live Podcast. It was great fun to share insights with these two highly experienced investment professionals. There was so much to discuss regarding the current state of Pension America. The American worker is counting on us to ensure that they have the opportunity for a dignified retirement. Regrettably, many of these folks aren’t in a position to accomplish that objective. I hope that you find our insights beneficial. As always, please don’t hesitate to reach out to me with comments and questions. Always happy to respond.

ARPA Update as of December 22, 2022

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

Christmas came a few days early for a couple of multiemployer plans and their participants, as the PBGC approved the initial application for two MPRA Suspension plans, the International Association of Machinists Motor City Pension Plan and the Toledo Roofers Local No. 134 Pension Plan. As a reminder, participants in these two MPRA plans have been living with reduced benefits. The approval of the Special Financial Assistance (SFA) is the first step in seeing the original benefits restored and the participants made whole. It has been a long and arduous process for these folks. In total, these two plans have 1,384 participants and they will be receiving a total of $85.1 million in SFA.

In addition to approving the initial applications for the funds above, the PBGC also approved the supplemental applications for another four plans, including the Local 365 UAW Pension Trust Fund, the Management-Labor Pension Fund Local1730 ILA, the Local 408 International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America Pension Plan, and the Idaho Signatory Employers-Laborers Pension Plan. They will receive roughly $32.6 million for their nearly 6,000 plan participants.

The Retirement Plan of the Retirement Fund of Local 305 CIO’s Pension Fund, a Priority Group 5 plan, filed its initial application on December 20, 2022, and the PBGC has until April 19, 2023, to act on the application. This plan is seeking $34.7 million for its 918 members. The PBGC has 25 applications to review at this time, including 13 initial or revised submissions and 12 supplemental filings. There were no applications either rejected or withdrawn during the prior week.

A Little History Lesson – First Bond Index

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

Kuhn Loeb & Co. (there’s a name from the past) introduced the first bond indexes in the summer of 1973. It included:

Kuhn Loeb Bond Index = 3,650 investment grade corporate bond issues with MV = $120.1 billion

Long-term Corporate bond index = 1,481 issues with MV = $66.0 billion

Government/Agency bond index = 361 issues with MV of $138.4 billion.

Art Lipson was the head of fixed-income research and the inventor of these indexes. Ron Ryan, CEO, Ryan ALM, Inc. went to work for Art at Kuhn Loeb in early 1977 which was merged into Lehman Bros. in late 1977. Art decided to be a salesman and Ron took over as head of fixed-income research. 

Ron went on to design most of the popular Lehman bond indexes, including the Aggregate Index, which remains the industry’s primary bond benchmark today. If you desire insight into how to consistently beat the Aggregate Index, Ron is your man. His incredible insights have been recognized for decades, including being awarded:

William Sharpe Index Lifetime Achievement Award

  Money Management Letter Lifetime Achievement

Book “U.S. Pension Crisis” – IP Gold Award

  Bernstein Fabozzi Award of Excellence

I continue to learn new things every day from Ron despite being in this industry for 41 years and I know that you will, too. Thanks, Ron, for being a true visionary.

Rising Interest Rates are Humbling for Bond Funds and Their Managers!

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

Last week, The Wealth Advisor published an article highlighting the onerous impact of rising US interest rates on the performance of large (>$1 billion) bond funds, which were screened using data compiled by Bloomberg and Morningstar Direct and excluded short-duration offerings. There were 198 funds that were identified and from that universe, it was determined that only two – T. Rowe Price Dynamic Global Bond Fund and the JPMorgan Strategic Income Opportunities Fund (3.4% and 0.3%, respectively) – had produced a positive return in 2022 as of the date of the article 12/21/22. This news isn’t shocking, as we understand that interest rate risk is the single greatest risk for bonds.

Fixed-income managers have enjoyed nearly four decades of declining US interest rates. That tailwind, which fueled superior performance, has been replaced by a significant headwind that threatens to blow for quite some time to come. How will plan sponsors and their consultants react to this shifting landscape? Will they continue to use core and core plus bond mandates as performance instruments or will they determine that the best use for fixed income is in the certainty of their cash flows? Those cash flows can be modeled to meet ongoing benefit payments and plan expenses chronologically from the next month’s liquidity needs as far out as the allocation can fund. The beauty of this implementation is the fact that benefits and expenses are future values that are not interest rate sensitive.

One can effectively use bonds through a cash flow matching strategy (aka CDI) without fear of the Fed and how their policy decisions might negatively impact bonds. This “sleep-well” at-night strategy has been time-tested for decades.  It was called Dedication in the 1970s and 1980s. Through this implementation, plan sponsors have now bought time (expanded time horizon) for all of the alpha assets in their portfolios to grow unencumbered. Why make a bet on where rates are going? Just eliminate interest rate risk by adopting a CDI implementation. You can now sit back on FOMC announcement days without fear of what the Fed will say. How comforting!

This is NO Time to be Greedy – revisited

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

Producing posts/articles on the Ryan ALM, Inc. blog has been very rewarding for me. I’ve now produced more than 1,160 posts that date back 2019 when I joined Ryan ALM and prior to that during my days at Kamp Consulting Solutions (KCS). Producing a blog on a fairly regular basis is challenging in that I want to make sure that what we produce is relevant and helpful for the pension/investment industry. I hope that it has proven to be. Furthermore, there is also no place to hide! Everything that has been produced is there for all to see on the Ryan ALM web site http://www.RyanALM/Insights/White-Papers.

I have great respect for the people in our industry but often find myself challenging how pension plans are operated, which seems to be driven by the status quo. After more than 41-years in this business I’ve come to the conclusion that given each plan’s unique liability stream, it is critically important that a custom solution be created to ensure that the plan’s benefit promises (liabilities) to its participants are SECURED at both a reasonable cost and with prudent risk.

It is fine to claim to be a long-term investor, but it is another thing not to react to a market environment that appears to be entering a watershed event, which don’t present themselves often. The nearly 40-year decline in US interest rates from 1982 that fueled the massive equity and bond returns during that period of time had gotten long in the tooth despite the incredible returns posted by US equity markets in 2021. I highlighted my concerns in a November 22, 2021 post titled “This is No Time to be Greedy”. My concerned centered on the fact that asset allocations had gotten much more aggressive and allocation to both bonds and cash had been significantly reduced.

I said, “the thought that fixed-income assets could be a source of liquidity when equity investments were under pressure was a very reasonable assumption during the last 39 years of a bull market for bonds. However, the next equity market crash may be driven by inflationary pressures forcing US interest rates higher. In that case, all bets are off as to the ease by which bonds can be sold and cash raised! I further stated, “bonds should be used for their value… the certainty of their cash flow – period! “An additional benefit (of cash flow matching) includes the mitigation of interest rate risk on the portion of the portfolio that is being defeased through CDI, as cash flows are funding future benefits which aren’t interest-rate sensitive.”

Pension plans’ fund status had improved, and funded ratios were more elevated than they’d been in years. I challenged those in the pension industry to not sit idly. That after 40 years of easy money we were about to experience a paradigm shift that would significantly impact pension America. The US Federal Reserve doesn’t believe that the current inflation is transitory. As such, they are committed to raising US interest rates until they have accomplished the job of getting inflation back to 2%, whether or not you believe that is the right objective. Given strong employment and wage growth, the Fed has their job cut out for them. This idea that the Fed will engage in a great pivot seems unreasonable. Core inflation remains too high, US rates are likely to continue to rise putting additional pressure on return-seeking fixed income strategies and equities. Have you prepared your portfolio to deal with this likely reality? There was an opportunity at the end of 2021 to take some risk off the table. Are we going to miss another opportunity in 2022? We, at Ryan ALM, urge pensions to separate liquidity assets from growth assets. Let the fixed income allocation be the liquidity assets that buy time for the growth assets to grow unencumbered!

 

SECURE ACT 2.0 – Should We Get Excited?

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

SECURE ACT 2.0 continues where the SECURE Act ended following its 2019 passage. There is a lot to this legislation We will be touching on various aspects of this legislation to discuss how it helps Americans in their quest to achieve a dignified retirement and where it might fall short.

In order to better understand aspects of this legislation, I reached out to my friend Kendra Isaacson, Pensions Policy Director and Senior Tax Counsel at Senate HELP Committee for Senator Patty Murray, Chair, who with other members of her team were able to shepherd through this legislation and get it included into the Congressional Omnibus Spending Bill. Kendra shared her favorite aspects of the bill, including the following: “I am the most excited about the pension-linked emergency savings accounts. Our theory is that this will draw lower-income, new participants in the retirement system who may have been nervous about locking their money up in a retirement plan.” I couldn’t agree more that this is an important step forward.

For years, I felt that DC offerings were nothing more than glorified savings accounts that were often raided by participants experiencing financial hardship. Having a “side pocket” for emergency purposes is an outstanding enhancement that hopefully encourages lower-wage earners to establish a retirement account. According to Kendra, “it is designed that employers would match into the associated defined contribution plan so participants can have an emergency savings account for short-term needs while working on their long-term retirement savings.” Again, this is a wonderful step forward IMHO.

I can assure you that there are individuals on both sides of the aisle that have great concerns about whether or not this legislation goes far enough. As stated earlier, we will continue to highlight the pros and cons in future blogs. Until then, let’s celebrate Kendra and her committee’s accomplishments.

Do These Data Releases Impact 2/1/23 Fed Actions?

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

Interesting data releases today. 

On the one hand, we have existing home sales data that came in light at 4.09 million (annual units) relative to forecasts of 4.17 million for the 10th monthly decline in a row. This got equity markets rallying as investors cheered the slowing housing market and the potential impact that has on interest rates (down). But we also had the monthly release of the Consumer Confidence Index that came in hot, blowing away expectations at 108.3 vs. 101.2! Since there is a positive correlation between sentiment and spending, bond markets have begun to sell off. Treasury yields which had fallen to start the day are basically flat at this point. 

What will the Fed do? Do we have an environment in which the consumer has shifted their spending away from housing to other goods and services, especially services, making the Fed’s job more difficult in fighting inflation, or is the dramatic fall in housing activity a prelude to collapsing spending? Equity investors would have you believe that the Fed will soon realize the error of their way and begin the great pivot, while bond investors remain far more cautious. Of course, only time will tell, but it is always interesting to see what drives markets and investors’ actions.

Ryan ALM: Believe it or Not

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

Occasionally, we at Ryan ALM stumble over a fact or two that surprises us, and we like to bring it to the attention of our readers of this blog. Obviously, inflation and the impact of these inflationary pressures have been a dominant force within the US markets in 2022. Aggressive US Federal Reserve policy action (perhaps a bit late) has driven interest rates upward (FFR +4.25%) from historically low levels creating great uncertainty regarding the near-term implications for the US economic environment. Debate rages over the likely outcome with participants arguing about the potential for a hard or moderate recession or the Goldilocks soft landing.

Much debate has also focused on the primary source(s) of US inflation. Was it the stimulus provided to prop up our economy during the initial Covid-19 response or was it the disruptions to our ability to meet heightened demand as a result of global production disruptions, including the impact from both Covid-19 and the Russian invasion of Ukraine? There’s good reason to believe that both contributed to the four-decade-high inflation experienced in 2022, which makes the argument that inflation is transitory more difficult to accept.

Fact 1: In the nearly three-year period of 2020 to YTD 2022, the US has injected $6.8 trillion in net Treasury Bills, Notes, and Bonds into our economy. During the GFC (2008) and for 4 years subsequent, the US injected “only” $6.4 trillion in net Treasury debt to help the economy get back on solid ground from the most harmful recession that our nation had experienced since the Great Depression of the late ’20s to mid-’30s. That is a tremendous amount of stimulus that continues to work its way through the system. In addition, we have one of the strongest labor markets at this time with unemployment continuing to remain quite low at 3.7%, while annual wage growth hovers in excess of 6% as of November 2022. Yes, inflation has moderated during the last several months, but it continues to remain quite elevated relative to the Fed’s target level of 2%. Given the extraordinary stimulus and strong labor market, it is likely that a more aggressive stance by the Fed will be needed to finally eradicate inflation… not to mention the Fed’s intention to create real rates or an inflation premium which has averaged 3.04% since 1960.

One last observation (fact 2), in reviewing the history of Treasury issuance since 2000, it continues to surprise me that the US only issued $510 billion of gross Treasury Bonds during 2020 relative to the total gross issuance of nearly $21 trillion in Treasury debt (2.4% of total issuance) when the yield on the 30-year bond had fallen to 1.28% during the initial reaction to Covid-19. Why would you not extend maturity when rates were at historically low levels and not likely to fall any further? Instead, the US Treasury has had to refinance trillions in $s at ever-increasing interest rates? This scenario is likely to continue well into 2023 as the Fed appears committed. What a wasted opportunity.

ARPA Update as of December 16, 2022

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

Happy Hannukah, Merry Christmas, and Happy Holidays! We wish you a wonderful holiday season.

We are pleased to provide you with the latest activity related to ARPA’s implementation. There were no new or supplemented applications filed with the PBGC during the most recent week. However, the PBGC was busy approving two supplemental applications for the Teamsters Local 617 Pension Plan and the Graphic Arts Industry Joint Pension Plan, which will receive additional SFA funding amounting to $31.0 mil and $82.2 mil, respectively. This additional funding will further secure the promises for 10,745 plan participants.

There are currently 30 applications that have been submitted to the PBGC that have yet to be approved with 12 of those being initial applications and two more that were revised and resubmitted. As a reminder, the window is currently open for Priority Group 5 plans (projected to become insolvent before 3/11/2026) with Priority Group 6 plans slated to become eligible to file an initial application beginning February 11, 2023.

The data above reflects the activity of multiemployer plans submitting an initial or revised application through December 16, 2022. Despite the good work to date from the PBGC, there is plenty left to accomplish. Next year should prove to be quite active as the bulk of potential ARPA/SFA recipients has yet to file.

Still Not A Believer?

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

There appears in today’s WSJ an article by James Mackintosh titled, “The Markets Don’t Believe the Fed”. It is incomprehensible to me that this continues to be the mindset of the average investor given the fact that the Fed controls short-term US interest rates. Whether you believe that the economic fundamentals exist to support aggressive interest rate policy, the Fed is in control. I began posting blogs about “believing” the Fed in March 2022. My first post, “You Should Believe The Fed” stated that “we (Ryan ALM) are NOT in the habit of forecasting rates, but after a 39-year bull market for bonds that produced historically low absolute and real interest rates, we felt pretty comfortable in our expectation” that US interest rates would rise.

I further wrote, “if you don’t believe us, I highly recommend that you listen to the US Federal Reserve, as they came out very aggressively yesterday (March 16th) and indicated that the 25 basis point move in the Fed Funds rate (first increase since 2018) would be followed by 25 bps increases at each of the remaining six meeting in 2022. Incredibly, those 25 bps increases didn’t occur, because they were superseded by a 50 bps increase, four 75 bps increases, and finally earlier this week another 50 bps elevation in the Fed Funds Rate (FFR)!

I went on to ask “is your portfolio structured to withstand this aggressive move upward in rates? What have you done to secure the promised benefits? If nothing has been done, are you prepared for deterioration in the plan’s funded status and increased contribution expenses? This is the reality that our pension industry is facing.” Regrettably, most sponsors and their consultants have done little to nothing to protect and secure the promised benefits. Expectations now exist that the Fed will raise the FFR to a level that exceeds 5% given the stickiness of “core, core” inflation and concerns that an easing in its restrictive policy might just result in a similar and painful outcome to what was experienced during the late ’70s and early ’80s.

Given the reluctance on the part of market participants to believe the Fed, long-term interest rates have fallen significantly during the last couple of months creating an environment of easier money conditions similar to what we witnessed earlier this year. 30-year mortgage rates are once again below 6.5% having peaked at 7.1% during this rate cycle. With long rates in the mid-3% range, just how much economic activity will be thwarted? The US labor market remains strong and wage growth remains well above the level desired by the Fed. Initial jobless claims, which had recently been elevating, came in 20,000 below forecast to a low level of 211,000.

I believe that it is fair to ask, “what has the Fed accomplished to date”? Their policy actions certainly haven’t driven inflation anywhere close to the desired 2% target. It appears to me that the Fed has much more work to do. Will market participants finally believe them? As we witnessed in 2022, you ignore the Fed at your own peril.