Good News for DB Plans: Bond Yields Rise Post-Election
There’s good news for defined benefit plans in the wake of the November elections, says Russell Investments’ Bob Collie.
In a recent blog post
, Collie notes that interest rates and 10-year Treasury bond yields have risen in the short period since the fall elections. In fact, he says, the latter rose by 50 basis points, which he calls “a big jump in a short period.”
“The increase in yields means that corporate pension plans will have seen their funding level improve,” says Collie. He adds a slight caveat that Treasury bond yields have risen more than corporate bond yields and that pension liabilities are calculated from the latter, but still concludes that “a sustained increase in rates would mean significant improvement in the funding situation.”
While the November results have spelled good news for pension plans’ funded status, there still is ground to make up, Collie indicates. He cites the observation by Russell’s Brian Frick that funded status was down for most of this year, and that despite the improvement in funded status that has occurred since the election, “there’s still a long way to go for most plans to achieve their funding goals.”
And the recent increases in interest rates and bond yields validate what he calls pension plans’ “massive bet on interest rates rising.” He adds another caveat that “a bet on rising rates is one that has historically had the odds stacked against it and investors ought to be wary before assuming that a rising rate environment means easy gains,” but still argues that if pension plans “take advantage of higher yields to increase their bond allocations, there will still remain, in aggregate, a significant bet on rising rates.”