Recent rate volatility offers a rare opportunity, but if history serves as any guide the window to act will be fast to close.
10 YR Treasury Breaches 1.5%, 30 YR Treasury Tops 2.2%
Over the last year, we have published a series of analysis that highlighted how the 2013 “Taper Tantrum” ultimately ended as a missed opportunity. Recent rate volatility is creating a similar opportunity but the window to act will be fast to close.
In the first two months of 2021, the 10 year and 30 year Treasury rate has increased swiftly, rising over 50 basis points (bps). The upward move in rates has supported a boost in long duration AA corporate yields, which have increased 66 bps in just under 2 months. We expect that pension liabilities (measured as of February month end) will be 7% to 10% lower. Recall that during 2020, the FTSE AA pension index declined 70 bps, increasing liabilities by approximately 10%. This run up in rates in just two months has nearly reversed the losses in liabilities incurred during 2020. A plan that was 80% funded on 12/31/2020 could now be 85% to 88% funded, which is a similar increase that plans experienced during the Taper Tantrum of 2013. However, as we highlighted in our Lost Decade paper, sponsors, on average were too slow to act, deciding instead to wait at the gates of their glide paths for interest rates to continue to rise—they never did.
Will Sponsors Have the Nimbleness to Act Now?
We certainly hope that since 2013, careful planning, whether through glide path design or implementation of a monitoring mechanism facilitating quick action, has taken place and allocations are shifting accordingly. It simply behooves plan sponsors to not delay and shift assets from equities to long duration fixed income and lock in these gains. Even a “legging in” approach is more beneficial than trying to time this rise in rates. Timing such matters is precarious to say the least. Waiting for rates to rise even more could ultimately result in missing out…again. As the chart shows below, while there were moments of increases in the 10YR they were ephemeral.
As of 02/25/21. Source: www.macrotrends.net and Voya Investment Management.
Furthermore, on an IRS measure of liabilities, absent any new relief from congress, the phase out of MAP21 relief will most likely increase required contributions in the next few years, depending on a plan’s IRS funded levels and the IRS liabilities, which will increasingly be determined on a lower interest rate. Sponsors may want to consider accelerating contributions and increase their hedging assets further, an action that will not only preempt the need for future contributions but also take advantage of what the market has to offer right now.
We sincerely hope to see sponsors rise to the occasion and exhibit the courage needed here to take action, lock in gains, reduce PBGC premiums and avoid potential future required contributions.
The old adage rings true during these turbulent times:
Well done is better than well said.