Insights

In July, pension plan sponsors experienced rising liability discount rates, as Treasury rates moved to year-to-date highs. Continuing positive returns from global public equities also helped increase funded status for many corporate pension plans. Plans likely experienced gains in funded ratios due to lower liabilities from increasing liability discount rates and from higher risk asset returns. The Treasury yield curve experienced increases across most tenors last month with the largest increases occurring at longer maturities. Total-return-focused plans likely experienced gains in funded status due to lower liabilities combined with strong asset returns from global equity markets. NEPC’s hypothetical total-return pension plan experienced a funded status increase of 4% compared to an improvement of 1.6% for our LDI-focused plan.

Rate Movement Commentary

The Treasury yield curve increased by approximately 15 basis points in July, and remained inverted from the one- to 10-year tenors. The 10-year yield increased 16 basis points to 3.97%, while the 30-year yield increased 17 basis points to 4.02%. Rates across the yield curve have now increased on a year-to-date basis. Long- and intermediate-credit spreads decreased during the month of July.

The movement in Treasury rates and credit spreads resulted in higher pension discount rates used to discount pension liabilities. The discount rates for NEPC’s hypothetical pension plans rose approximately six basis points for the open total-return plan rate at 5.29%, while the discount rate for the frozen LDI-focused plan was up approximately four basis points to 5.23%.

Plan Sponsor Considerations

Equities were in the black in July, while long-dated fixed-income markets experienced losses due to higher Treasury rates. Treasury yields picked up in July with the yield curve shifting higher and hitting year-to-date highs. Modest decreases in credit spreads offset some of the rate increases, resulting in slightly higher 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 hedge ratio ranges to avoid becoming overhedged to longer maturity rates with a flatter yield curve.

Market Environment and Yield Curve Movement

In July, U.S. equities gained 3.2%, according to the S&P 500 Index. Non-U.S. equity markets performed similarly to U.S. stocks with international developed markets also gaining 3.2% in July, according to the MSCI EAFE Index. Emerging market equities were up 6.2% last month, according to the MSCI EM Index. Broadly, global equities gained 3.7% during the same period, according to the MSCI ACWI Index.

The Treasury curve increased by approximately 16-to-17 basis points from June to July at all tenors 10 and greater and remained inverted from the one- to 10-year tenors. This resulted in losses for fixed-income markets, with long-credit fixed income experiencing only modest losses due to contracted credit spreads. During the month, the Bloomberg Long Treasury Index declined 2.2% and the Bloomberg Long Credit Index lost 0.1%.