Pension Indicator Updated for July 31, 2019

The Fed, Trade Wars and Interest Rates

 By: Grant Guyuron, Senior Managing Director, Clearstead

The same issues that led to a sell-off in May have remained top of mind into early August: what will the Fed do and what will happen with the U.S. and China trade negotiations. On July 31st, the Fed announced a 25 bps cut to the Federal Funds Rate. In early August, after a meeting between representatives from the U.S. and China, the President announced the implementation of new tariffs on Chinese goods. Both of these events had a profound impact on interest rates. Rates had declined in advance of the FOMC meeting as the market anticipated the 25 bps cut from the Federal Reserve; however, the announcement of additional tariffs on China came as a surprise and jolted markets. Treasury bond prices have rallied (yields fell), and risk assets have sold off considerably to start the month of August. As of August 5th, 2019, the 10 Year U.S. Treasury Bond Yield had fallen to 1.74%i.

The fallout from all of this for plan sponsors is likely a lower funded status. Despite wider spreads, long corporate rates have been positively correlated with long Treasury bonds. For underfunded plan sponsors with public equity exposure, a lower funded status is likely through the first week of August.

In July, U.S. equities were positive (+1.4% for the S&P 500), international equities were negative (-1.2% for the MSCI ACWI ex USA), and U.S. bonds basically clipped coupons (+0.2% for the Bloomberg Barclays U.S. Aggregate)ii. Liability values were mostly higher in the month; the FTSE Pension Liability Index returned 1.73% in Julyiii. So many plan sponsors either treaded water or lost a little ground relative to their liabilities.

The trade war and Fed are likely to remain front and center in 2019, so plan sponsors should be thinking about portfolio positioning, controlling risk, and taking a holistic approach to managing their assets. Here’s hoping for some better news the rest of the month.

As always, thanks for reading, and drop us a comment on how we're doing.

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Information provided in this article is general in nature, is provided for informational purposes only, and should not be construed as investment advice. Performance data represents past performance.  Past performance is not indicative of future results.

iSource: Yahoo Finance

iiSource: Bloomberg

iii FTSE Pension Liability Index, as of 7/31/19

Year to Date Investment Mix 
Plan TypeGrowthBalancedLDI LiteLDI
 Frozen (for several years) 1.3% 1.1% 2.1% 3.3%
 Recently Frozen -1.5% -1.7% -0.7% 0.4%
 Ongoing Traditional -4.4% -4.6% -3.6% -2.5%
 Cash Balance 0.5% 0.3% 1.3% 2.5%
Month-over-Month Investment Mix 
Plan TypeGrowthBalancedLDI LiteLDI
 Frozen (for several years) -0.4% -0.4% -0.2% 0.0%
 Recently Frozen -0.8% -0.7% -0.6% -0.3%
 Ongoing Traditional -1.1% -1.1% -1.0% -0.7%
 Cash Balance -0.5% -0.5% -0.3% 0.0%
12-Month Change Investment Mix 
Plan TypeGrowthBalancedLDI LiteLDI
 Frozen (for several years) -2.9% -1.6% -0.7% 3.9%
 Recently Frozen -5.0% -3.7% -1.4% 1.7%
 Ongoing Traditional
-7.1% -5.8% -3.6% -0.5%
 Cash Balance -3.6% -2.3% -0.1% 3.2%

Frozen Plan 7 31

Recently Frozen Plan 7 31

Ongoing Plan 7 31

Cash Balance 7 31