Tag Archives: Interest Rates

10.02.26
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Ryan ALM, Inc.’s Concern: Stagflation

By: Russ Kamp, CEO, Ryan ALM, Inc.

The U.S. capital markets are sending some interesting, and perhaps conflicting, signals. Treasury yields have risen dramatically, energy prices remain elevated, diesel supplies continue to be constrained, and corporate credit spreads are beginning to widen. Yet inflation expectations remain relatively well anchored and economic activity has held up surprisingly well. What are we to make of all this? I believe we may be witnessing the early stages of an environment tilting toward stagflation.

The problem, as I’ve written before, is that much of today’s inflation isn’t being created by excessive demand. It is being driven by supply issues, particularly within energy. The Fed can raise the Fed Funds rate by 25 basis points, 50 basis points, or perhaps much more, but none of those actions will produce another barrel of oil, gallon of diesel, or unit of refining capacity. Clearly, we aren’t going to plow fewer acres, ship less food, or stop moving goods around the country simply because interest rates have increased. Energy sources are embedded in virtually everything we produce and consume. Higher interest rates don’t fix that problem.

What higher rates can do is reduce demand elsewhere. Unfortunately, that means households get hit from both directions. They pay more for gasoline, food, utilities, and transportation because of the current energy supply issues, while simultaneously paying more for mortgages, auto loans, credit cards, and other financing because of the Fed. Businesses face the same squeeze through higher operating costs combined with a higher cost of capital. Is that really the prescription we want when the original inflationary driver is primarily a supply problem?

The markets are beginning to reflect this tension. The 10-year Treasury yield has moved well above 5% (currently 5.27% at 12:07 pm), producing an extraordinarily high real yield given that longer-term inflation expectations remain near the mid-2% range. At the same time, credit spreads have begun widening, while oil remains expensive and diesel markets remain stressed. Credit spreads aren’t signaling a crisis today, but the combination of these many factors bears careful watching. If credit conditions continue deteriorating while energy costs remain elevated, we’ll have an increasingly powerful stagflation cocktail based on stubborn inflation accompanied by weakening economic activity.

The Fed should obviously be concerned about inflation. However, I still question whether monetary policy can effectively address the inflationary environment that we’re experiencing without creating other problems in the process. The Fed can diminish demand. It cannot create supply. If energy prices remain elevated while real interest rates stay near more restrictive levels and credit conditions continue to deteriorate, we shouldn’t be surprised to see economic growth suffer. We’ll continue watching Treasury yields, inflation expectations, oil and diesel prices, and credit spreads closely as we monitor conditions for stagflation. Current economic conditions are beginning to get very interesting.

09.30.26
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Is AI Investment Reaching A Natural Limit?

By: Russ Kamp, CEO, Ryan ALM, Inc.

I’ve been spending a lot of time recently thinking about the incredible amount of capital being thrown at Artificial Intelligence (AI). There is no question that AI has the potential to dramatically change how we live and work. But does that mean that every dollar being invested in AI infrastructure is going to generate an acceptable return? I’m not so sure. As interest rates continue to rise, I think investors need to start asking a different question. Instead of asking, “How big can AI become?”, perhaps we should be asking, “How much AI capacity can actually be built economically?”

AI investment is staggering. Microsoft, Amazon, Alphabet/Google, Meta, and Oracle (the Hyperscalers) are at the center of this massive infrastructure buildout. Until recently, these companies generated so much cash that they could fund most of their capital spending internally. That situation is changing rapidly. AI-related capital expenditures are consuming an enormous percentage of their operating cash flow, and the hyperscalers are increasingly turning to the bond market and other forms of financing to keep the spending machine going. Four of the five major hyperscalers have issued significant amounts of bonds in 2026, with Microsoft being the notable exception. Collectively, hyperscaler borrowing has already reached roughly $200–$220 billion this year. Wow!

Why should we care? Because the cost of money matters and this massive investment could profoundly impact equities, bonds, real estate, private equity, private credit, etc. DB Pension plans need to take notice! When Treasury yields were 1%-2%, financing massive data centers and other AI infrastructure was relatively inexpensive. Today, Treasury yields have climbed above 5%, and the 30-year Treasury bond is closing in on 5.7%, while some long-term hyperscaler debt is being issued at 6% or more. Oracle has recently  issued long-dated debt carrying coupons approaching 8%. This reality changes the economics dramatically. It isn’t enough for a $10 billion or $20 billion AI project to generate revenue. It needs to generate a return sufficient to compensate investors for the cost of the capital, operating expenses, electricity, depreciation, technological obsolescence, and the risk associated with the project. What is that return likely to be and where is that return going to come from?

Capital isn’t the only potential constraint. AI requires enormous amounts of electricity, generation capacity, transmission, transformers, land, cooling, water, semiconductors, construction, and, of course, data centers. A large AI campus can require hundreds of megawatts of electricity. High-density data centers can cost roughly $14-$16 million per megawatt, meaning that a 500 MW facility could cost approximately $7.5 billion to construct before considering the broader power infrastructure necessary to support it. We keep hearing about seemingly unlimited demand for AI. Fine! But there certainly isn’t unlimited electricity, grid capacity, construction capability, or CAPITAL. Why does the investment community seem to assume otherwise?

Furthermore, the AI trade may be creating its own headwind. Think about this for a minute. Massive AI capital expenditures consumed free cash flow from most of the hyperscalers. Declining or exhausted free cash flow creates a need for external financing. Greater borrowing produces more corporate bond supply. More bond supply can contribute to higher yields and wider credit spreads. Higher financing costs increase the hurdle rate on the next AI project. Eventually, some projects simply won’t make economic sense. That seems like the beginning of a vicious cycle to me.

As mentioned previously, the implications extend well beyond technology stocks. Equity investors need to determine whether these enormous capital expenditures are actually producing an acceptable return on invested capital. Bond investors are being asked to absorb hundreds of billions of dollars of new AI-related debt and need to be compensated appropriately. Real estate investors financing data centers must compete against a >5% risk-free Treasury yield while dealing with higher construction and financing costs. 

I’m certainly not suggesting that the AI boom is about to end. But I do believe that the AI investment thesis may be entering a very different phase. The first phase was about AI models, semiconductors, hyperscalers, and data centers. The next phase may increasingly be about the scarce resources necessary to support all of that growth, beginning with capital and including electricity, generation, transmission, transformers, cooling, powered land and water. The winners may ultimately be those controlling the scarce resources rather than simply those spending the most money.

Markets have an interesting habit of believing that trends can continue indefinitely. From my 45-years in the investment industry, I’ve come to appreciate that they don’t. There is always a natural capacity to every investment. AI will prove to be no different. At today’s cost of capital, the important question isn’t how much AI infrastructure companies want to build. It is how much they can afford to build while still generating an acceptable return. Are today’s investors and pension plans adequately considering that distinction? I’m not convinced that they are.

I have an idea. While you wait for the AI thesis to play out, buy time (extend the investing horizon) by creating a cash flow matching (CFM) portfolio that will secure the monthly benefits and expenses for some time – say 10-years. This will enable that AI thesis to perhaps generate the desired return while it grows unencumbered.

09.28.26
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ARPA Update as of September 25, 2026

By: Russ Kamp, CEO, Ryan ALM, Inc.

I hope that those of you in the Northeast weren’t too badly impacted by this weekend’s nor’easter. For those of you who are like me and had no idea what the difference is between a hurricane and a nor’easter, here are three main differences. A nor’easter is an extratropical (non-tropical) cyclone, that is formed through temperature contrasts between warm and cold air masses, and usually hugs the U.S. East Coast or nearby Atlantic ocean. A hurricane is a tropical cyclone, formed over warm water in tropical or subtropical oceans. Lastly, the nor’easter season is generally Fall to early Spring, while hurricane season is June to November.

Regarding ARPA and the PBGC’s effort to implement this important legislation, the week wending September 25th was relatively calm, as there was one initial application submitted, one application seeking SFA approved, and another withdrawn. There are currently 38 applications before the PBGC.

Brooklyn, NY-based Production Service and Sales District Council Pension Fund, a non-priority fund, submitted its initial application seeking $92.1 million in SFA for the 3,848 members of the pension fund. As with many of the recently submitted applications, this plan is located in the Second Circuit. On the other hand, Retirement Plan of Local 1102 Retirement Fund, also a non-priority fund, withdrew its initial application in which it sought $3.7 million for the 220 members of that plan.

I’m pleased to report that Bakery Drivers Local 550 and Industry Pension Fund has FINALLY received approval for its application. As you may recall, this plan has been on a merry-go-round in its pursuit of SFA grant money. They were initially denied due to ineligibility back in January 2023. This priority Group two member resubmitted an application in May 2025 only to have that application denied. Well, they must have gotten all their ducks in order, because on September 18, 2026, they were approved for $144.5 million in SFA for its 1,122 participants. Congratulations!

In other ARPA news, there were no plans denied and not others sought to be added to the waitlist.

Timing is everything in life, and for those plans that are about to receive SFA grant assets, their timing couldn’t be better, as U.S. interest rates continue to move higher providing plan sponsors with a great opportunity to secure those promised benefits at substantially reduced future values. Let us know how we can help you.

09.17.26
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Will the 25 bps Increase Tackle a Supply Shock Inflation?

By: Russ Kamp, CEO, Ryan ALM, Inc.

I’m a touch confused by today’s market activity. The significant rally in both bonds and equities seems a bit of an overreaction to yesterday’s Fed action in which they raised the Fed Funds Rate 0.25% to 3.75%-4.0%. It was the first increase in the FFR since 2023.

Using monetary policy against a supply-driven inflation shock may eventually reduce aggregate demand, but it cannot produce another barrel of oil, reopen a closed shipping route, increase refining capacity, or lower the physical cost of moving goods. It can’t do any of that!

The Fed indicated that inflation remains elevated and that the increase should support a “timelier return” to 2% annual inflation. Yet the current inflation problem is energy focused. August’s headline CPI was 3.4%, with gasoline prices jumping 3.9%. WTI oil is still priced above $100, diesel remains near record levels, jet fuel’s price is roughly double February levels, and natural gas prices remain sharply higher. These issues are unlikely to be addressed through a modest increase in short-term rates.

The Fed believes that changes in the FFR will affect other interest rates, potentially influencing household and business spending and ultimately economic activity. However, raising short-term rates doesn’t address the current shortfall in oil supplies. A trucking company isn’t likely to respond to a 25-bp hike by delivering 5% fewer groceries. Farmers don’t decide NOT to harvest corn because overnight rates increased. Airlines, utilities, manufacturers, and logistics companies continue consuming energy because much of their demand is relatively inelastic in the short run.

Since the Fed can’t directly increase oil supplies, will its attempt to reduce demand elsewhere prevent the oil shock from becoming imbedded inflation? Only time will tell. But how much time? Today’s market action says to me that investors believe that inflation has already been conquered. I’m not so sure.

09.02.26
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Still Think That They Are Performance Drivers?

By: Russ Kamp, CEO, Ryan ALM, Inc.

Bonds enjoyed a nearly 4-decade bull market as U.S. interest rates plummeted from historic highs to an environment of negative real rates. It was unprecedented. As a result, bonds were perceived to be performance drivers. But are they?

We are often told by plan sponsors or their advisors that they can’t invest in a cash flow matching (CFM) strategy because de-risking the portfolio will negatively impact the fund’s ability to achieve the annual return on asset (ROA) assumption. Is that reality?

Facts:

  • The Aggregate bond index has produced a -0.29% annualized return for the 5-years ending August 31, 2026!
  • A CFM portfolio would have generated a return commensurate with its YTW (or YTM) during that 5-years. Shorter maturity (1-5-year defeasement) CFM portfolios were yielding about 1.6% at that time. That equates to a nearly 2% per year return advantage. Still think that CFM is a drag on performance?
  • U.S. inflation remains elevated. A CFM portfolio is the perfect pension inflation hedge since it is fully funding liabilities that have inflation in the projected benefits to be funded.
  • The direction of U.S. rates is uncertain, although rates have been trending higher, putting more strain on core fixed income strategies that tend to underperform when rates rise.
  • For the 28-years prior to the bond bull market (1953-1981), U.S. rates rose. Are we in a secular long-term rising rate environment?
  • Bonds should only be used for their cash flows of interest and principal upon maturity, which can be modeled to match and FUND a pension plan’s liabilities (benefits and expenses), with certainty barring any defaults.

Plan sponsors have not had this level of U.S. interest rates in roughly 20-years, providing them with a wonderful opportunity to protect the improved funded status, while securing the liquidity necessary to meet those pesky monthly obligations. Will this opportunity go unheeded just as the one presented in 2000 did? We know that failing to protect and preserve DB plans in 2000 was followed by two major equity market corrections that crushed pension funding and caused contributions to skyrocket. Do you think that sponsors of DB plans have the financial wherewithal to see contributions escalate once more? I don’t!

We recommend converting your current core fixed income allocation, with all of its interest rate risk, to a cash flow matching bond portfolio, that will carefully match and fund all of the monthly obligations as they come due. A CFM portfolio matches interest and principal against future obligations, and in doing so, eliminates interest rate risk as future values are not interest rate sensitive. If you owe a plan participant $2,000 in benefits next month, it is $2k whether interest rates are at 2% or 10%. The higher rates reduce the future value cost of the promised benefits in present value $s. We are seeing roughly 6% YTMs in our recent 30-year assignments and a >50% reduction in the cost of those future benefit payments.

You could continue to use a core fixed income allocation with all of its uncertainty or you could create certainty within a portion of your plan that doesn’t exist today. I suspect that your participants would appreciate knowing that the promised benefits are secure no matter what transpires in global markets.

08.11.26
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Will Rising Rates Rattle Equity Markets?

By: Russ Kamp, CEO, Ryan ALM, Inc.

Uncertainty abounds! That uncertainty continues to drive expectations for oil, inflation, and interest rates up and down like a Yoyo. However, recent inflationary trends suggest that U.S. interest rates could continue higher. The U.S. 30-year Treasury bond’s yield is only 4 basis points off it’s cyclical peak since rates began rising aggressively in March 2022.

At Ryan ALM, we recently completed a cash flow matching (CFM) analysis for a public fund in which we were able to defease the pension plan’s liabilities out to 2100. The portfolio that we created to accomplish that objective had a YTM of 6.03%. Barring any defaults (occur at <0.2% in IG space), that is what the plan sponsor should expect to receive over the life of the program. Unlike a broadly diversified pension asset allocation striving to hit an ROA target and all of its standard deviation, there is NO volatility associated with that long-term return and cash flows. There is no potential for a major drawdown impacting future contributions and the plan’s funded status.

Just how has the bond market changed? This morning, our head trader, Steve Devito, shared with us the characteristics for a couple of bonds that had been shown to him. Here is an incredible example of where rates have gone: $2mm par value of ORCL 6.70 maturing in 2056 @ +245 above the comparable Treasury offered at a 7.70% YTM (quality:Baa2 / BBB-). WOW! Here you have an investment-grade corporate bond trading at a yield of 7.7%. The average ROA for a public pension plan is roughly 6.75%. In another example, Steve shared: $2mm GOOGL 6.50 maturing in 2066 @ +124 above the comparable Treasury at a YTM of 6.50% AA (40-year maturity). Google is offering a AA credit 40-year bond at a YTM of 6.5%!

I suspect that there are many other examples of high quality corporate bonds trading at yields greater than 6%. So, I ask: At what level of rates do U.S. corporate bonds become too much competition for U.S. equities and all their uncertainty? As a pension plan sponsor, wouldn’t you prefer to have the certainty of a CFM portfolio securing your pension liabilities from next month chronologically as far into the future as your allocation goes? In the meantime, your residual alpha assets have just been granted a longer investing horizon allowing them to wade through today’s uncertainty without being encumbered with a cash sweep of dividends and capital distributions.

As we regularly write, we are always willing to showcase how CFM can positively impact your plan by providing a free analysis. You will get a better understanding of your plan’s cash flow requirements and an understanding of the potential cost reduction of the future benefit payments. You’ll also have a greater appreciation for the possible significant reduction in asset management fees that is achieved through the use of CFM. Now is the time to act before the markets negatively react to these rising U.S. interest rates.

07.31.26
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Why wait?

By: Russ Kamp, CEO, Ryan ALM, Inc.

Due to great uncertainty brought on by the conflict in the Middle East and the war’s potential impact on the price of oil ($85.63 at 10:01 EST) that could drive inflation higher, U.S. long-dated Treasury yields continue to rise. In fact, the U.S. 30-year Treasury yield has not been this high (5.26%) since July 6, 2007, when the yield was at 5.28%. Where yields go from here is anyone’s guess, but I will share that oil, as represented by WTI, has risen 24.9% since June 30, 2026. Given the exposure that oil or oil-derived inputs have in more than 6,000 products, the significant rise in the recent price could impact inflation for quite some time, even if oil soon began to flow more freely.

We recently saw the average 30-year BBB+ bond trading at 110 bps above the prevailing 30-year Treasury. If that relationship is maintained, pension plans could potentially cover most of their desired return on asset (ROA) annual target (average public pension plan has a 6.75% ROA) through bonds. Should inflation spike once again, there is no telling how high U.S. interest rates could rise. Despite domestic equity’s apparent immunity to market fundamentals and geopolitical risks, there will come a time when higher U.S. yields become too attractive to ignore leading to the potential for rebalancing out of equities into fixed income. That action will likely lead to lower equity prices and falling bond yields.

So, I ask, why wait? Why wait to take risk from your current asset allocation before the markets act? Why not SECURE your benefit promises through cash flow matching (CFM) well into the future and reduce the volatility related to returns, contributions, and funded status? Why not take advantage of very attractive bond yields? As a reminder, core, active fixed income strategies are highly interest rate sensitive. Rising yields negatively impact bond prices, as seen in the performance of the Aggregate Bond Index, which is up only 0.1% annually for the 5-years ending June 30, 2026. However, a CFM strategy, which secures benefits that are future values, eliminates interest rate risk, as future values are not interest rate sensitive.

Public pension plans have done a good job of improving their funded ratios since bottoming after the Great Financial Crisis but remain only one market crash away from repeating this vicious cycle. Get off the performance rollercoaster. Secure your promises chronologically for some period into the future (your plan’s funded status should dictate the allocation). You and your participants will sleep much better knowing that the promises made will be kept.

07.22.26
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A “Joe Friday” Moment

By: Russ Kamp, CEO, Ryan ALM, Inc.

Jack Webb, who portrayed Joe Friday in the 1950s crime drama “Dragnet”, was famous for saying in season two “all we want are the facts, ma’am.” The catchphrase eventually morphed into a shorter phrase with the help of comedian, Stan Freberg, who released his parody “St. George and the Dragonet” in which he stated, “just the facts, Ma’am”. That phrase has been carried forward in Dragnet remakes. But, I digress.

Today, I present to you a Joe Friday moment. Here are the facts: Oil prices have risen by 27% since July 6th. U.S. Treasury yields are rising across the yield curve, and the 30-year Treasury yield is within 6 bps of this cycle’s high of 5.2%. The 10-year Treasury yield is currently 4.66% as of 10:24 am on 7/22/26. Investment grade corporate bond spreads have finally started to widen although slowly. According to Morgan Stanley, the “average” yield on a BBB+ corporate is 6.23% or roughly 1.1% higher than the yield on the comparable 30-year Treasury bond. Inflation, which moderated in June, is likely to spike higher given the current direction of activity in the Middle East and its impact on shipping lanes.

These are the facts. They suggest to me, and hopefully you, that the current U.S. interest rate environment is ripe for de-risking activities through cash flow matching (CFM). Why continue to live with the uncertainty surrounding oil, inflation, rates, etc., when you can SECURE your fund’s promises in the near-term?

I wish that I had a crystal ball to help me forecast the future but alas I don’t, and I suspect that you don’t either. Given the lack of clarity related to future events, I suggest that we live in the moment. We have an environment in which the cost of those future promises (benefit payments) can be cut dramatically. An environment that brings an element of certainty to a very uncertain process. An environment in which U.S. interest rates are providing plan sponsors with a significant portion of the annual return on investment target.

We’ve seen this scenario before. At the start of the 2000s, we had pension plans extremely well-funded and contribution expenses well-controlled. That opportunity went unheeded. The result of that inaction proved to be disastrous as we saw DB pension funding get pounded by two major equity market corrections. Are you confident that another major correction isn’t around the corner?

Like Joe Friday, I rely on the facts, which I’ve now presented to you. Ignore them at your peril.

07.17.26
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DB Pension Plans: Only One Certainty

By: Russ Kamp, CEO, Ryan ALM, Inc.

As you look at the landscape for defined benefit pension plans, it is readily apparent that there is only one CERTAINTY. Each month your fund must fulfill a promise. Benefit payments (and expenses) can’t wait to be paid. Like clockwork, B&E come due each month whether markets have behaved or suddenly made finding liquidity a challenge. What have you done to make sure that those obligations are met?

Pension plan management is primarily focused on the fund’s assets. Sponsors and their advisors put together an asset allocation framework that is singularly focused on the annual required return on assets (ROA). But those asset allocation frameworks come with a lot of volatility and uncertainty. Many factors contribute to market movements. Each one out of the control of the pension sponsor.

Do you know where stocks will be trading in 1-hour let alone 1-month, 1-year, or 1-decade? How about inflation? Interest rates? What about the Middle East, Ukraine, China, etc.? Why live with such uncertainty?

How comforting would it be to know what a pension fund’s annual contributions will be for the next 10-, 20- or 30+-years? No guessing, no budgeting woes, and no unfortunate spikes in annual contributions for public systems that harm one’s ability to support the social safety net. The process that can create this level of certainty has been used for decades: Cash Flow Matching (CFM).

As previously mentioned, current pension management approaches are return focused, which only guarantees volatility. Volatility in returns, contributions, and funded status! A CFM approach, which is the careful matching of asset cash flows (principal and interest) with the liability cash flows of benefits and expenses, will bring certainty (outside of a rare IG default) to the management of DB pensions. Importantly, liquidity is created and available when needed. There is no forced selling to fulfill those commitments. No scraping of dividend income which is detrimental to the long-term success of the equity program.

Importantly, a CFM program also “buys time” for the residual assets (presumably the alpha assets) to grow unencumbered with the goal to meet future liabilities. A longer investing horizon will dramatically enhance the probability of those assets meeting long-term return expectations.

Given that there is currently only one certainty (monthly obligations) for sponsors of DB pension plans, wouldn’t it be beneficial to create another level of certainty through the SECURING of the monthly promises? Why wait, especially given all the uncertainty facing market participants today? Ryan ALM, Inc. is always willing to provide you with a free analysis of what CFM could do for your fund. We’re ready to help you sleep better at night.

05.22.26
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The Benefit of Higher U.S. Interest Rates

By: Russ Kamp, CEO, Ryan ALM, Inc.

Rising interest rates can often create stresses in an economy and within the capital markets. They certainly make financing big ticket items more painful. They can destabilize equity markets, although it seems as if the current equity market is immune to any risk at this time. They harm most fixed income managers/strategies, as rising rates lower the present value of their bonds.

However, rising rates are GREAT for cash flow matching (CFM) strategies, as the higher rates reduce the cost of those future pension promises (benefit payments). We were recently asked by a public pension fund to provide them with an analysis of what CFM could potentially do for them in this environment. They provided us with the requisite data – projected benefits, expenses, and contributions as far into the future as possible – which we then ran through our cost optimization model that we call the Liability Beta Portfolio (LBP).

The output is compelling! We can secure this fund’s net (after contributions) liabilities (all of them!) through September 30, 2053. The future value (FV) of those liabilities is $86.2 million. However, the plan needs to set aside only $50.1 million in present value (PV) assets to defease those liabilities with certainty. The $36.1 million cost reduction is locked in on the day that the portfolio is created. That “savings” equates to a cost reduction of 41.9%!

So, this plan sponsor can now SECURE pension payments for 27-years. The residual assets not needed in the CFM portfolio can now grow unencumbered. If I were them I’d just buy a S&P 500 ETF creating considerable savings from lower management fees and far less complexity. Furthermore, the plan sponsor now knows what contributions will look like for the next nearly three decades. They won’t have to be alarmed should markets suffer a deep and extended correction, as the assets AND liabilities will move in lockstep.

By the way, these benefits were achieved without taking substantial risk, as our process only uses investment-grade corporate bonds rated BBB+ or better. Defaults, which are the only risk within the strategy, have been 0.2% (2/1000 bonds) annually for the last 40-years according to S&P.

Why use CFM? The benefits are incredible, including; certainty, security, all the necessary liquidity, an extended investing horizon, lower management fees, stable contributions, and improved sleep! If these benefits sound attractive to you, provide us the same info that our public fund prospect did (see above) and we’ll provide you with a free analysis, too. We are confident that you’ll be as blown away as they were and the many clients that we are proud to support.