Insights

In February, pension plan sponsors experienced higher liability discount rates amid a rise in interest rates. During this period, global public equities posted strong returns, and the Treasury yield curve rose across most tenors. Total-return-focused plans likely experienced positive changes in funded status due to higher discount rates and gains from equities. NEPC’s hypothetical total-return pension plan experienced an improvement of 3.8% in funded status compared to an increase of 1.9% for our LDI-focused plan.

Rate Movement Commentary

The Treasury yield curve increased in February, and remained inverted from the one- to five-year tenors. The five-year yield rose 35 basis points to 4.26%, while the 30-year yield increased 16 basis points to 4.38%. Rates across the yield curve have risen since last year.

The movement in Treasury rates and credit spreads resulted in higher pension discount rates used to value pension liabilities. The discount rates for NEPC’s hypothetical pension plans increased about 18 basis points to 5.38% for the open total-return plan, while the discount rate for the frozen LDI-focused plan rose 22 basis points to 5.33%.

Plan Sponsor Considerations

Global public equities rallied and posted significant gains in February, and long-dated fixed-income debt posted losses fueled by higher Treasury rates. Treasury yields increased in February as inflation remained somewhat elevated. A widening of longer-maturity credit spreads contributed to an uptick in liability discount rates used for valuing pension liabilities. At NEPC, we anticipate continued market volatility and the potential for market disruption. Plan sponsors should remain diligent about monitoring sources of change in funded status versus expectations, as equities and interest rates are likely to remain volatile. This includes closely monitoring ranges of hedge ratios to avoid becoming overhedged to longer-maturity rates with a flatter yield curve.

Market Environment and Yield Curve Movement

In February, U.S. equities gained 5.3%, according to the S&P 500 Index. During the same period, non-U.S. equities also experienced gains with international developed markets returning 1.8%, according to the MSCI EAFE Index. Emerging market equities surpassed global public equity returns and were up 4.8% last month, according to the MSCI EM Index. Broadly, global equities rose 4.3% during the same period, according to the MSCI ACWI Index.

In February, the Treasury curve rose modestly from the previous month and remained inverted from the one- to five-year tenors. This generally resulted in losses for investment-grade fixed-income markets, with long-credit fixed income experiencing somewhat lower losses compared to long Treasuries. During the month, the Bloomberg Long Treasury Index decreased 2.3% and the Bloomberg Long Credit Index fell 2.6%.