Perspectives

Epilogue or Post-mortem? Even the Golden Age of Private Credit Wasn’t So Golden A Timely Update to Our Three-part Series We stayed true to our word in our first paper of this series and “muster[ed] unusual restraint” by not wading into the debate about whether private credit is standing on the precipice. But we said nothing of an epilogue to…

Part 3: Mitigating the Cost of Private Credit’s Illiquidity The Role of HY CDX as a Private Credit Proxy   Key Takeaways from Parts 1 and 2 In the first two installments of this series, we highlighted a few critical observations: Private credit offers an attractive illiquidity premium. After meticulously adjusting for duration, leverage and pricing convention differences, we find…

This article broadens investment skill beyond market forecasting to include structuring skill—encompassing engineering, market-making, operational and access capabilities. Learn how allocators can evaluate managers using both qualitative and quantitative frameworks. Key Takeaways: Investment skill extends beyond market forecasting to include structuring skill The four key components of structuring skill include: engineering, market-making, operational and access Managers with higher structuring skill…

Part 2: The Private Credit Premium is Real. The Performance Drag of Leverage? Also, Real. Net Return From Leverage in Private Credit Strategies   In our prior paper, we compared private-market indices with comparable credit-quality public-market indices. Importantly, in an effort to present a fair and balanced comparison, we adjusted the returns of the various indices for differences in duration, leverage and pricing conventions (mark-to-market [MTM] vs. book value accounting). This analysis supports the…

Hedge funds often use hurdle rates that are low—and often zero—to measure portfolio performance. Moreover, returns above these hurdle rates incur performance fees that can, at times, exceed 20%. At a minimum, we believe hurdle rates should match the prevailing interest rate; otherwise, investors end up paying performance fees for cash returns. If these returns are indeed true alpha and…

Part 1: The Private Credit Premium is Real Measuring the Illiquidity Premium Institutional interest in private credit[1] has expanded meaningfully in recent years, driven by the potential to capture an illiquidity premium and access a broader range of issuers than traditional public capital markets alone can provide. And while it is tempting to join the current raging debate which has…

With an average funded status of 107% and over 50% seeing a surplus, corporate defined benefit (DB) plans enter 2026 as well-funded as they have been since before the Great Financial Crisis of 2008.[1] For many plan sponsors, the strategic focus has shifted from designing glidepaths to designing strategies that seek to grow the surplus. Given this evolution, we thought…

On November 21, the Bureau of Labor Statistics (BLS) confirmed what many had suspected: there would be no CPI report for October. This was not surprising given that the government was shut down for the month of October and, therefore, no data was collected. Nonetheless, this is unprecedented dating back to the inception of the Consumer Price Index for All…

NISA Investment Advisors, LLC (NISA) is pleased to present the 19th edition of the biennial Survey of Nuclear Decommissioning Trust (NDT) Sponsors. This report is published as a resource for, and service to, the NDT community and is intended to provide insight into investment activities and trends within the NDT industry. Information contained herein can be beneficial for a variety…

Since the 2010s, much has changed with respect to U.S. single-employer defined benefit (DB) plans: plan sponsors are at the highest funding levels seen in decades; a focus on funded status volatility and risk reduction has taken center stage; and changes in regulation allow sponsors greater funding flexibility. Given these changes, it is worth reassessing the value of the pension…

It has been approximately four years since the passage of the American Rescue Plan Act (ARPA) legislation, which contained a Special Financial Assistance (SFA) provision for certain multiemployer plans.[1] This landmark bill provided the opportunity for financially troubled plans to apply to the Pension Benefit Guaranty Corporation (PBGC) for funding relief. Since this December marks the deadline for an initial…

As many employers have fully funded and hedged their pension plans, some are beginning to turn their attention to other post-employment benefits (OPEB) liabilities as the next addressable source of balance sheet volatility. OPEB liabilities are valued for financial reporting purposes similar to pension liabilities, i.e., projected future benefits are discounted at prevailing interest rates based on yields of high-quality…

NISA’s CEO and Head of Investment Strategies David Eichhorn participated in a panel discussion at the Treasury Market Conference held this Fall at the Federal Reserve Bank of New York. This was the 10th annual version of this conference, which was established by the Fed, Treasury, SEC and Commodity Futures Trading Commission (CFTC) to analyze and improve the resiliency of…

Watch Chief Economist Stephen Douglass as he examines America’s ever-rising debt burden, reviews the difficult policy options for addressing it and considers the implications for the Treasury market. The discussion is moderated by NISA’s Client Services Managing Director Cheryl Hanson. Watch here The materials from the presentation are available upon request.

The U.S. economy suffered from the worst labor shortage in at least six decades during the pandemic. This imbalance peaked in late 2021 with twice as many job openings as unemployed workers and wage inflation running at a four-decade high around 8% annualized. The Fed recognized the severity of the problem (a couple of quarters late, admittedly) and responded with…

Bundled LDI seeks to deliver the features of a custom-tailored liability hedging strategy with the simplicity of an all-in-one turnkey structure.

In higher interest rate environments, derivatives can be just as effective at delivering market exposures. Ultimately, many investors’ concerns about higher rates stem from a decrease in the relative attractiveness of a particular market beta, NOT the synthetic market itself.

NDT fixed income managers may still have an opportunity to harvest material losses.

Prompted by recent funded status shock experienced by some pension plans that offer lump sums, as well as new IRS regulations regarding plan provision changes, we look at modifications that could better align reality with expectation.

A Trend Strategy apparently runs completely counter to market efficiency, yet seems to have a rather uncanny ability to not just hold up during prolonged equity drawdowns, but on occasion, positively thrive.

For multi-employer plans yet to receive Special Financial Assistance, it is possible to use the assets you will have tomorrow with the assets you have today. 

Funding rules originally intended to provide contribution relief for corporate pension plans are now having the exact opposite impact, leading to tough decisions for many plans.

Partial annuity buyout transactions (PRTs) inherently pit two groups of participants against one another – those in the transaction and those remaining within the plan. Fortunately, publicly available bond market data can help measure the potential harm to each group.

Fixed income markets globally are worth approximately $120T, with millions of securities to pick from. Additionally, there are a multitude of derivative instruments and structured products. These markets offer many times more opportunities for outperformance compared to equities – by comparison MSCI-World has less than 2,000 tickers. Plus, active fixed income managers take a myriad of different approaches, including credit…

NISA Investment Advisors, LLC (NISA) is pleased to present the 18th edition of the biennial Survey of Nuclear Decommissioning Trust (NDT) Sponsors. This report is published as a resource for and service to the NDT community. It is intended to provide insight into investment activities and trends within the NDT industry. Information contained herein has many potential uses and a…

Fitch Ratings surprised market participants late Tuesday by downgrading the sovereign credit rating of the U.S. Government from AAA to AA+, citing “expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance…over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.” Fitch left…

A strong core is foundational to overall health and stability, and your investment portfolio is no exception. Cutting out or down on ”excess” (e.g., beta disguised as alpha), while also employing a blend of the right strategies with moderation enhances a portfolio’s risk-adjusted returns. Investors also need to be wary of throwing out effective enhancement strategies in favor of seeking…

This post examines whether our market-based measure, and the resulting Economic Loss to Beneficiaries (ELB), is materially impacted by the size and liquidity of the insurer bond market.

To paraphrase Tolstoy,[1] market ascents resemble one another, but each swoon is unique in its own way. Above-trend inflation, record Fed tightening and the invasion of Ukraine all conspired to deliver the worst year for financial assets in more than a generation in 2022 (see Figure 1). Can we learn anything from a year as unusual as 2022, or should…

Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act in December 2022 as part of the Consolidated Appropriations Act, 2023. While many provisions impacting both DB and DC plans were included in the legislation, a hard-to-find and often-overlooked provision in SECURE 2.0 extends and enhances plan sponsors’ ability to use assets from overfunded pension plans to…

Veteran Fedwatchers like to quip during tightening cycles that “the Fed will keep hiking until something breaks.” They are only half joking. The path of past tightening cycles is littered with the roadkill of market participants who got caught on the wrong side of a duration and/or convexity bet. Well now something has finally broken, and the FOMC has to…

For several months now, many of us have been wondering: why hasn’t anything blown up yet? The Powell Fed’s historic tightening campaign has caused relatively few episodes of financial distress (with the notable exception of crypto). The sudden failure of the nation’s 16th largest bank – the 2nd largest bank failure in American history – has put that question to…

As we are all well aware, stubbornly high inflation dominated headlines in 2022 and has been a significant contributor to elevated market volatility. Even if the stubbornly high inflation of 2022 is beginning to abate in Q1 2023, the lessons it can teach us remain relevant. It should be no surprise that inflation protection strategies have regained popularity among investors,…

A new analysis of the Final SFA Rule shows that plans receiving ARPA relief could surpass goals. When the Special Financial Assistance (SFA) provisions were originally published in 2021 by the PBGC as Interim Final Rules, it seemed unlikely eligible multiemployer plans would achieve the intended goal of maintaining solvency through 2051. However, with the recently published Final Rule, our…

Year-end is often accompanied by an uptick in Pension Risk Transfer (PRT) transactions. Accordingly, we are updating our estimates of the potential ELP associated with commonly used insurers based on current (10/31/22) market pricing. We developed this methodology to aid fiduciaries who are responsible for choosing an insurer as part of PRT transactions. Our ELP formula uses a market-based approach…

As most plan sponsors are well aware, the rapid increase in interest rates year-to-date has significantly reduced the size of their defined benefit pension liability. The discount rate for an illustrative liability with a duration of 12 years increased from 2.71% (12/31/21) to 5.61% (10/31/22), resulting in a 28% reduction in the size of the liability in 2022 so far.[1]…

A terrifying specter has reappeared in the darkest corners of the Eccles building. For the first time in 40 years, the Federal Reserve faces a material risk that inflation expectations could de-anchor and cause high inflation to become entrenched in the U.S. economy. Like a toddler afraid of the boogieman in the closet, the Fed fears the de-anchoring prospect despite…

In just eight days, the U.K.’s bond market became so disrupted that the Bank of England (BoE) stepped in to backstop the gilt market on September 28th. Between September 19th and September 27th, 2022, U.K. 30-year inflation-linked bond yields rose from -5 bps to 189 bps, a net change of 194 bps resulting in a 42% loss. Nominal U.K. 30-year…

Economic analysis reveals a 14% range in credit risk costs among nine Pension Risk Transfer (PRT) insurance providers.  A pensioner’s benefit is fixed – they are not compensated for bearing the risk of lower quality insurers. With annual PRT transactions of approximately $40b, the disparity puts pensioners at risk of losing as much as $5b per year in the form…

Like so many K-12 teachers having to remind their students about the lessons they forgot over the summer, Federal Reserve Chairman Jay Powell’s speech in Jackson Hole last week was in many ways a recitation of the message he and his colleagues have delivered all year. There is no denying that Fed communications have gathered an increasing urgency throughout the…

After two years of pandemic firsts, we thought we’d used the adjective “unprecedented” for the last time in this cycle. Then the Federal Reserve did something on Monday that we’ve never seen them do before: intentionally leak a monetary policy action through the financial press two days prior to a Federal Open Market Committee (FOMC) meeting. We don’t know exactly…

Stable value investment options have experienced an evolution. Immediately after the Great Financial Crisis 13 years ago, wrap insurance providers, without exception, reassessed the risk implicit within the contracts they issued. They recalibrated risk budgets, developed stricter investment guidelines and raised fees, leaving stable value managers with something of a “take it or leave it” contract option. As time passed…

When the CME Group initiated trading on the new 20-year Treasury futures contract in March, we expressed cautious optimism that the new product would gradually develop liquidity to become another tool for hedging long duration interest rate risk. That optimism has been disappointing so far. It seems the 20-year contract never left the starting gate. After two months of trading…

Evaluating risk parity manager performance is complicated, so we set out to do it and did not find solid evidence of alpha for the cohort of managers. What we did find is a method for identifying what we believe is not only a more relevant benchmark for risk parity managers, but also an accessible investment solution that could be included as part…

The CME Group launched a new product earlier this month — a 20-year Treasury futures contract. This follows the Treasury Department’s recent introduction of a 20-year bond, which has not gone as well as they had hoped. Once this long-duration Treasury derivative develops sufficient liquidity, it should provide liability-driven investors another tool to enhance the accuracy of their interest rate…

If it wasn’t for the “high yield” classification or the less flattering term, “junk,” fallen angels (i.e., bonds downgraded below investment grade) may not need to fall as far. While high yield may seem like a homogenous asset class, upon further inspection fallen angels would stand out in a “high yield” crowd. While part of the high yield universe, these securities…

The Update In October, the Society of Actuaries (SOA) released mortality Scale MP-2021, giving us another opportunity to quickly reflect on the impact of mortality assumptions on pension valuation and management. For all points on this chart, we have modified our own input assumptions since our last SOA mortality scale update post to assume a 50/50 blend of male/female accrued…

On Dec 21st 2020, Tesla entered the S&P 500 with a market value of around $600 billion, representing ~1.7% of the index. Tesla became one of the five largest stocks by market value in the S&P 500. Newsworthy to be sure, but such transitions between indices due to eligibility are much more disruptive in the bond market. When a corporate issuer is downgraded…

Inflation has been a popular topic in recent client conversations, with good reason. Consumer prices are rising at the fastest pace since the early 1980s, raising questions about the path of monetary policy and the low-rate underpinnings of lofty risk asset valuations. As we first discussed last year, the pandemic recession uniquely targeted the services sector. The shift in consumption…

NISA is excited to announce a collaborative effort with Club Vita to help plan sponsors get a better assessment of the impact of mortality assumptions on their pension plans. A formal press release on this will be issued in the next few days. This effort leverages the data and mortality analytics developed by Club Vita to allow NISA to perform…

NISA Investment Advisors, LLC (NISA) is pleased to present the 17th edition of the biennial Survey of Nuclear Decommissioning Trust (NDT) Sponsors. This report is published as a resource for and service to the NDT community. It is intended to provide insight into investment activities and trends within the NDT industry. Information contained herein has many potential uses and a…

Executive Summary On Friday, July 9th, the PBGC released the interim final rules regarding the multiemployer Special Financial Assistance (SFA) program pursuant to the American Rescue Plan Act of 2021. As mentioned in a previous publication, the program provides much needed relief to multiemployer plans and provides greater benefit certainty for plan participants for years to come. For now, the…

Increased funded status, newly legislated funding relief and historical contribution credit balances have created clearer skies and calmer waters for plan sponsors as we look forward over the next several years – from a contribution perspective. What a difference a year makes. On March 31, 2020, the average corporate pension plan’s funded status stood at 85%.[1] One year later, the…

Total nonfarm employment in the US remains 8.2 million workers below the pre-pandemic peak reached in February 2020 and yet pockets of labor market tightening are already appearing. As is the case with other resources in the economy, both the supply of and the demand for labor have been extremely volatile throughout the pandemic. In the last few months labor…

Executive Summary The Special Financial Assistance (SFA) provisions of Sec. 9704 of the American Rescue Plan Act of 2021 (ARPA) provides a needed lifeline to many multiemployer plans facing insolvency in the coming decade. Eligible multiemployer plans will be able to apply for direct financial relief in the form of a single lump sum payment from the PBGC. The exact impact of…

Uncleared Swaps Public Service Announcement PSA: If your Plan could have more than $8 billion in uncleared derivative notional exposure this PSA is for you! An important regulatory measurement period is fast approaching.  Uncleared Swap Initial Margin requirements are changing! Please pardon this unusual Perspectives post. Although we typically choose topics for NISA Perspectives that may be of interest to…

We’ve written ad nauseum in these pages about the distorted and misleading economic data that have been produced during the unprecedented economic volatility of the pandemic. Despite turning a skeptical eye on hundreds of data releases over the past twelve months, we continue to find novel ways in which the data are inaccurate, often in material ways that undercut the…

NISA has consistently argued that risk assets play a useful role in end-state/hibernation portfolios, in moderation. While every hibernation portfolio needs to be designed based on its specific circumstances, a reasonable starting point to consider would be a portfolio comprised of 20% return seeking assets and 80% hedge assets – more specifically, 20% equity, 50% corporates and 30% Treasuries, designed…

The recent volatility in bond markets has prompted quite a few inquiries from clients. Here we consolidate our thoughts on the most frequently asked questions. What exactly happened in the Treasury market last month? Treasury yields have been rising steadily since last summer but an important shift occurred in mid-February. Between August 1 and February 12, all 64 basis points…

Earlier this year, a change occurred with respect to fixed income security pricing that many service providers in the industry (e.g., custodians, recordkeepers, etc.) considered a relative non-event. However, the change actually has significant implications for managing fixed income against a chosen benchmark, portfolio valuation and manager evaluation. Specifically, on January 14th, Bloomberg Barclays changed the time at which it…

A few clients have asked us recently for our thoughts regarding the potential for additional funding relief for single-employer DB plans. While we certainly aren’t Washington insiders, our common reaction was that we did indeed expect relief because 1) relief provided under prior legislation is scheduled to begin phasing out this year, 2) rates are even lower now than they…

Around the office, we have found longevity to be an engaging topic. A conversation about expected lifespans can quickly attract a small gathering of people observing and participating in the dialogue. Why? One answer is that it could be very primal – people are genetically programmed to think about survival, how long they might live, and what factors influence their…

Overheard on the NISA trading floor, Friday, November 6, 2020. Jess Yawitz: “Another strong payrolls report this morning, eh?” Stephen Douglass: “Yep, the jobs recovery continues to surprise to the upside. The details were even better than the headline figure too.” JY: “How so?” SD: “Well the headline figure showed a 638,000 gain in nonfarm payrolls in October but the…

In a post earlier this week, we explained how the Fed’s new flexible average inflation targeting (AIT) framework is motivated by a desire to prevent the zero lower bound constraint from de-anchoring inflation expectations to the downside. The logic of the new framework is intuitive. If the zero lower bound prevents the Fed from providing as much monetary stimulus as…

In a landmark speech at the Jackson Hole conference in late August, Chairman Powell announced the first significant revision to the Fed’s operating framework since 2012. While the transition from a flexible inflation target to a flexible average inflation target might seem to be a subtle one, that may not move asset prices immediately, it does represent an important evolution…

Regular readers will know we’ve been on somewhat of a campaign against economic disinformation this year, describing how data errors and faulty seasonal adjustments have been sending misleading signals about the true state of the labor market. Alas, we are called into action yet again. Every Thursday brings the release of jobless claims data. Like clockwork, the day also brings…

The pandemic caused a recession unlike any other in American history. We’ve previously discussed the unprecedented speed of the shock itself and the policy response. The 2020 recession is also unique in the degree to which it has impacted service sectors of the economy. Financial economists are trained to closely monitor manufacturing and goods consumption because these tend to be…

Very little currently could be described as “normal,” but curiously (and perhaps surprisingly) we think interest rates have made the very short list of all things normal in 2020. In a recent Webinar, we discussed various market-based assessments of the potential future direction of interest rates. The data presented that received perhaps the most attention was the implied distribution of…

As we have been saying, the seasonal adjustment process for initial jobless claims has been wholly inappropriate given the scale of job losses during the pandemic. Because the process is multiplicative rather than additive, the adjustment factor has now inflated the actual claims numbers by over 4.6 million since March, grossly exaggerating the true magnitude of job loss. We’re happy…

The combination of near all-time highs for the US large cap stocks and recent pricing of equity options at various strikes provides market participants with an interesting potential payoff profile over the next year. Specifically, investors can retain upside on the S&P 500 through 3,763, or 12.9% higher than its level at time of print, while securing a protection payment…

Gold is a hot topic these days. It is not hard to understand why: negative real yields exist on inflation protected U.S. Treasuries (TIPS) all the way out the curve, monetary policy has inflation hawks standing at full attention, and the recent performance of the U.S. dollar has left a lot to be desired. That said, exploring the merits of…

In this short note we demonstrate, primarily using a few examples and data points, how totally inappropriate it is to seasonally adjust initial unemployment claims during the pandemic and how doing so can lead to very misrepresentative “headline prints.” Why seasonally adjust claims? The purpose of seasonal adjusting is to remove distortions that result from holidays, plant re-toolings, retail sector…

Recent market gyrations once again remind us of the importance of risk management in all aspects of an investor’s portfolio. One common risk management tool is the use of multiple managers in a given asset class, with the goal of manager diversification in mind. Yet, pervasive positive correlations among active fixed income managers’ excess returns can greatly diminish this diversification…

The labor market continued its spectacular recovery in June. The jobs report released on Friday reflected a net gain of 4.8 million jobs, almost double the increase from May. The monthly change in nonfarm payrolls has set a record in each of the last four months: two record decreases followed by two record increases. The unemployment rate fell to 11.1%,…

When volatility increases for a particular market (e.g., interest rates, credit spreads, or equity), the potential pain felt by the wrong move or satisfaction felt by the right move can be amplified. Over the last few months we have seen risk increase across a multitude of markets. Our last piece “Are Static Hedge Ratios Really Static?” focused exclusively on how…

The May jobs report produced the biggest surprise we have ever seen from an economic data release. Nonfarm payroll employment increased by 2.5 million in the month, a full 10 million jobs higher than the Bloomberg median forecast for a loss of 7.5 million jobs. Not a single one of the 78 economists surveyed by Bloomberg predicted a positive number….

COVID-19 has delivered an economic shock of unprecedented speed and severity. The Federal Reserve under Chairman Powell has responded with the most aggressive policy action in the central bank’s 107-year history. As well as cutting the policy rate to essentially zero and offering nearly unlimited repo financing, the Fed commenced on March 13, an asset purchase program of staggering proportions….

While the COVID-19 crisis is certainly new for everyone, heightened volatility, a declining equity market, falling rates and widening credit spreads are not.  So although funded status has fallen this time around, as compared to the Global Financial Crisis (GFC), plans have been better positioned to weather the storm. The NISA PSRX index is structured to estimate the average funded…

The longest expansion in U.S. economic history ended in February. March ushered in a recession that will be unlike any other we have seen before. In the last five weeks, 26 million workers have filed for unemployment insurance. That’s more than the total number of jobs that were created in the entire decade-long expansion. The unemployment rate looks likely to…

Authors’ note: The timing of this piece may seem curious in these crazy times – specifically, a post that explores how “bond math” leads to increasing interest rate exposures in a low rate environment. We aren’t sure which reason is more appropriate to describe the timing; the fact that we started on this idea before the recent crisis or that…

I know this is not the time for a long note on rebalancing theory and best practices. That said, current market conditions will make upcoming rebalancing challenging and expensive – maybe more so than at any time in memory. So here are the cold, hard facts. Each point has further detail below if you would like more details. Transaction costs in…

This has been a frequent question from clients in the past week as the spike in cross-asset volatility sent Treasury yields plunging to record lows. The shortest and most accurate answer is: nobody knows. Just as nobody could have predicted that a novel strain of an otherwise common virus would be the catalyst, or that an ascendant Saudi Arabian prince…

Coronavirus has sent shockwaves throughout global financial markets. Since mid-February major global equity indices are down by 10-20%, investment grade US dollar credit spreads have widened by 30-50 basis points, and US Treasury yields have plummeted to all-time lows. The driving force behind this market turmoil is fear of the unknown. Nobody can predict how the virus will spread. Given…

For the fifth year in a row, the updated Society of Actuaries mortality tables have reduced the size of pension liabilities: While this short note is becoming a little repetitive (as evidenced by our Groundhog Day movie reference from last year), it provides a good opportunity to highlight some key points about longevity. What can we conclude from the new…

With no shortage of economic uncertainty in the world, it is natural to ask whether the US consumer can continue as the primary engine driving the expansion. Our answer to that question is yes. You’ve no doubt seen many of the well-known statistics describing today’s exceptionally strong labor market. The unemployment rate is at a 50-year low and there are…

A volatile September in the normally placid money markets inspired a number of client inquiries, and a few overzealous headline writers in the financial press. In this note we will review what happened, explain why we think it is more likely a technical disruption rather than an indication of broader stress in the financial system, and discuss steps policymakers may…

As we approach the next Fed meeting in September, expect more chatter on 1) whether they should ease and 2) what the inverted Treasury yield curve is saying about recession risk. Currently, the yield curve is shaped like a saucer. The highest rate is the 1-month bill, the lowest is the 5-year note, and the 30-year bond is only a…

NISA Investment Advisors, LLC (NISA) is pleased to present the 16th edition of the biennial Survey of Nuclear Decommissioning Trust (NDT) Sponsors. This report is published as a resource for and service to the NDT community. It is intended to provide insight into investment activities and trends within the NDT industry. Information contained herein has many potential uses and a…

Bond yields have fallen dramatically around the world this month, driven by the latest escalation of the trade war as well as signals that aggressive monetary stimulus will be forthcoming from central banks. Longer-tenor government bond yields in the US and Europe have fallen by 30-60 basis points this month, reaching record lows for many sovereigns. While trade policy risk…

The LIBOR transition continues. As we have outlined in previous notes, we are six years into a global effort to replace LIBOR with more robust reference rates. Though progress has been made, we can’t say at this point whether the transition will be successfully completed before the end of 2021, the deadline after which UK regulators will stop requiring banks…

Many plan sponsors find themselves in the fortunate position of approaching the end of their plan’s glidepath. Favorable market conditions and a contribution nudge from tax reform have made the end state appear on the horizon. This proximity to the finish line is certainly welcome and we expect plans are giving additional thought to what the end-state portfolio will look…

While we have seen shifts from active to passive across public markets, most notably large cap U.S. domestic equity, the alternatives space has historically been insulated to this change. While this may remain true for a large portion of the alternative investment universe, we believe a development may be on the horizon; led by managed futures and CTA type strategies,…

The last seven weeks have seen a dramatic repricing of the expected path of monetary policy. As recently as November 8, the fed funds futures market was pricing the Fed to hike all the way to 3%. Since then, more than two hikes have been removed from the expected path of policy. The fed funds futures yield curve is now…

Perhaps it would have been more fitting if the Society of Actuaries published their updated pension mortality improvement scale, MP-2018, on February 2. (For readers unfamiliar with the 1993 movie, Phil (Bill Murray) is stuck in a time loop, reliving one particular day – Groundhog Day.) By our estimates, the updated tables reduce the typical pension plan liability by about…

The LIBOR transition continues. A global effort has been underway since 2013 to reduce dependency on LIBOR, the benchmark interest rate discredited by a series of manipulation scandals and long criticized for reflecting bankers’ estimates of their borrowing costs rather than actual transactions. US dollar LIBOR has grown since the 1980s to underpin $200 trillion in financial securities ranging from…

When envisioning any new strategy, it is human nature to skim over the details. Previous posts in this series outlined the strategic rationale and practical applications of a different way to think about and approach asset allocation. As sometimes happens, it is easy for the “what” and “why” of a new strategy to take center stage, while the operational details…

After the latest round of the trade war, China has imposed tariffs on nearly all of the $130 billion in annual goods imports from the U.S. Though China could increase the tariff rate, they have effectively spent all their ammunition in terms of the scope of tariff application. As China-watchers have speculated as to what other tools the Communist Party…

Small balance annuity buyouts have been increasingly popular in the last few years – and for good reason. Given the fixed PBGC premium1 charged per participant, these participants represent the most costly balances for a sponsor to carry2. NISA’s position on annuity purchases has long been that they are better suited to serve cost management objectives than risk management objectives. Accordingly,…

In our previous post, we outlined a framework for evaluating asset allocation decisions and suggested that asset owners could enhance returns by separating investments into headline exposure (“overlay”) and committed capital (“underlay”) components. To better understand this approach, it may be helpful to provide some rationale of market drivers and explore some applications. It’s important to note that the practice…

Like visiting the doctor periodically, it is important for an investor to assess the overall health of her portfolio from time to time. At times, some of the most seemingly mundane parts of the checkup, for example a routine blood test, can be the most important and impactful. With that in mind, now might be a good time to revisit…

Annuity Buyout In recent weeks we have read a handful of commentaries suggesting that pension plans should take advantage of a “window of opportunity” to complete annuity purchases with insurance companies. They argue that plan sponsors should increase annuity purchases and offer lump sums and even consider fully terminating their pension plans. The unifying theme of these commentaries is that…

It was a surprise to no one when the Federal Reserve hiked rates this past Wednesday. The purpose of this note is to describe the “small technical adjustment” the Fed announced it would make to its operating framework for managing overnight interest rates. Since the financial crisis, the Fed has set the policy rate as a 25 bp range –…

‘Tis the season for both giving and receiving, and for pension plans it’s been an especially great season for receiving. Since the beginning of the year, equity returns are up 15-25% and the average pension plan’s funded status is up 4-5%.1 At the risk of sounding like Scrooge, however, we wanted to highlight a small wrinkle in the liability discount rate…

Sometimes you come across a piece of analysis that is interesting enough to feel compelled to pass it on. I had this reaction while reading AQR’s recently published paper titled “The Illusion of Active Fixed Income Diversification,” which examined the excess returns of active bond managers and concluded that a majority of managers may be simply overweighting credit to produce alpha. Perhaps…

As the effort to reform the U.S. tax code speeds through the legislative process, it is clear that, whatever the specifics of the ultimate bill, it could have a significant impact on investors. Despite the bill’s fluid nature, there is one provision that could have such profound implications for taxable investors that we thought it was worth highlighting before the…

The Phillips Curve describes the relationship between unemployment and inflation. First proposed in 1958, the theory holds that a low unemployment rate reflects a tight labor market that requires firms to raise wages to attract scarce labor. The Phillips Curve is therefore supposed to be downward sloping. Economists have since extended the model in a variety of ways: utilizing an…

The Federal Reserve took the first step this week of what will be a long journey towards normalizing its balance sheet after buying nearly $4 trillion in securities from 2008 through 2014. The Fed had $8.7 billion in Treasury securities that matured on October 31. When those bonds matured, $2.7 billion was reinvested back into the five Treasury coupon securities…

The end is nigh for the London Interbank Offered Rate. The CEO of the British markets regulator, the Financial Conduct Authority, announced yesterday that LIBOR will be phased out by the end of 2021. Though headlines proclaiming the “death of LIBOR” may catch some by surprise, this announcement is merely another step forward in a global process that has been…

NISA Investment Advisors, LLC (NISA) is pleased to present the 15th edition of the biennial Survey of Nuclear Decommissioning Trust (NDT) Sponsors. This report is published as a resource for and service to the NDT community. It is intended to provide insight into investment activities and trends within the NDT industry. Information contained herein has many potential uses and a variety of audiences, including…

Summary We examined the statistics behind the claim that large pensions drag down a company’s valuation and accordingly how annuity buyouts allow a sponsor to remove this discount from their stock price. As you might have guessed, this conclusion rests on some erroneous assumptions and interpretations, and what makes for an exciting graph doesn’t quite translate into the real world…

The Treasury Department is considering issuing an ultra-long bond with a maturity greater than 30 years. The idea was first raised in post-election interviews with then-nominee for Treasury Secretary Steven Mnuchin and formalized last month when Treasury requested a response on the subject from primary dealers and the Treasury Borrowing Advisory Committee (TBAC). Both of these groups advised Treasury against…

It is a well-known market truism that the Fed tries to avoid surprising markets with its monetary policy decisions, especially when those decisions result in a rate increase. Indeed, the Fed has not issued a rate hike that was less than 70% priced in since 1994. On the other hand, the central bank has delivered a handful of rate cuts…

Changes in yields can provide insights into the market’s views on the potential results of anticipated policies of the Trump Administration. One of the more interesting dynamic relationships is that between TIPS and nominal Treasury yields, which offers guidance regarding real growth and inflation expectations. The graph below depicts changes in selected real and breakeven inflation rates (calculated as the…

Summary In recent months we’ve observed that equity’s effective spread duration (ESD) seems especially pronounced—for example, the S&P 500’s ESD is currently about 25 years vs. its ten-year average of about 15 years. We thought it would be worthwhile to dig a little deeper to understand this dynamic. In a nutshell, below average spread volatilities and above average correlations between…

Taxable insurance portfolios can enhance returns by employing the tax code’s preference for dividends. By orienting their holdings toward equities that pay higher dividends, taxable investors can shift their total return to the more favorably-taxed dividend return component and away from the price return. The end result: after-tax alpha relative to a passively managed index portfolio.

The ongoing equity rally and the rise in Treasury yields prompted us to revisit this analysis. Between yesterday’s close (December 1) and November 10, when we originally calculated these estimates, the yield of the 30-year Treasury increased 15 bps while the MSCI ACWI climbed 0.3% higher. As a consequence, plan sponsors have likely continued to experience additional funded status gains…

It has been an interesting week. Regardless of your political leanings, Tuesday’s election seems to have already produced another unlikely winner: defined benefit plan sponsors. Between last Friday and yesterday (November 10), the yield on the 30-year Treasury increased 38 bps while the MSCI ACWI jumped 2.2%. This increase in rates and equity prices has boosted funded status, and some…

Last week, we participated in the annual P&I Pension Settlements Strategies conference. We will share the full materials in an upcoming post, but I thought one exhibit was worthy of special attention. One key point in our presentation was that pensions are not inherently risky. Rather, asset allocation drives the risk profile of the pension plan. Perhaps not an earth-shattering…

Can rates in the U.S. only go up from here? With Treasury yields reaching historical lows recently, it may be tempting to think of U.S. rates as having hit a floor. Yet before making tactical adjustments, it may be prudent to examine rates not just in absolute but in relative terms. Doing so suggests rates may not be as low…

As the (seemingly) never-ending search for yield continues in year eight of the “low for long era,” an oldie but a goodie comes to mind. The cash and carry trade, which undoubtedly raises fond memories from your “Intro to Derivatives” course, has caught our eye recently. As a brief reminder, a cash and carry trade is when an investor purchases…

I received some feedback asking whether the high correlation of managers both to beta and to each other applies to “Aggregate” managers as well. As a brief follow-up to the previous post, I thought I would share results we obtained from the eVestment Analytics database of managers benchmarked to the Barclays Aggregate index. The bottom-line: Aggregate managers are even more…

It should surprise no one that many active fixed income managers tend to have systematic beta exposure—meaning, they tend to perform well when the overall credit market does well, and underperform when it doesn’t. For Long Government/Credit managers, the likely explanation for this relationship is that most managers consistently overweight credit. As a result, they receive the extra return in…

It may pay to be a little more cosmopolitan when it comes to your bond portfolio. Yield differences between comparable maturity instruments in different countries can offer opportunities to enhance returns, particularly for longer-term investors. By buying foreign bonds and using currency forwards to lock in future exchange rates, investors may be able to realize gains over what they could…

When you go to a restaurant for a nice meal, do you prefer to order from the prix fixe menu or go the à la carte route? With prix fixe, the chef has selected the entire meal for you, so you can be reasonably confident you’ll get something satisfying. But if you know exactly what you want to eat, ordering…

We talk with a lot of pension plan sponsors who strategically want to hedge their liabilities by buying long duration corporate bonds but who tactically are discouraged from doing so by low long-term interest rates. In the past we have explored the idea of separating general interest rate and corporate spread exposures when hedging pension risk,* and given some recent…

The advent of investable risk premia indices brings beta overlay to a new level. These tools allow investors to adjust the pre-packaged factor weights of traditional asset classes toward a different weighting scheme based on priced factors and investors’ preferences. Portable Alpha For some time now, investors have recognized that separating alpha and beta can be desirable. Because alpha is…

The retirement landscape is shifting, as the workforce grows older and increasingly relies on its defined contribution plans for retirement security. NISA’s target date glidepath design seeks to manage risks that undermine the ultimate goal of retirement: sustainable and stable income. Our multi-asset and risk-controlled solutions can be employed in the design of your plan’s default option to help participants…

January’s steep drop in equity prices and rise in bond prices mean that many institutional investors are thinking about the same thing: rebalancing. With such a divergence in returns between equities and bonds, asset owners are understandably looking to get their portfolios back in line with their allocation targets. The problem is that not all asset classes are that easy…

You may have missed that the Employee Benefit Research Institute (EBRI) released a study on retirement spending back in November.* The headline conclusion was that while spending in retirement tends to fall slightly over time on average, the spending patterns of individual retirees vary pretty widely. If markets don’t perform on average, and people don’t retire, spend, or live on…

Returns will be hard to come by in 2016. That is perhaps the least controversial prediction we can offer for the New Year. Though modest, we do have one suggestion for potentially improving an investor’s overall return: consider substituting Treasury Floating Rate Notes (FRNs) for T-bills/Short Term Investment Fund. FRNs have several features that make them attractive as cash equivalents….

Since the New Year is always a time for reflection, and we are pension geeks, we thought it would be interesting to take a look at how the biggest defined benefit corporate plan sponsors have shifted their plan allocations over the last decade. Using company filing data gathered for our Pension Surplus Risk Index, we can obtain a high-level estimate…

Brazil’s sovereign debt was recently downgraded below investment grade (IG). Before the downgrade, its index-eligible bonds were included in both the Barclays US Credit Investment Grade Index and the JPMorgan Emerging Market Bond Index, two of the more commonly followed indices. Beginning 1/1/16, these bonds will fall out of the IG index. What happens next is perhaps surprising. There is…

Working in the pension industry, it can be confusing to know which side to root for when new longevity projections come out. And when the Society of Actuaries released new mortality projections in October1 that predicted lower life expectancies than previously indicated, our reaction was decidedly mixed. While as human beings hoping to live to a ripe old age this…

Markets are currently implying nearly an 80% probability that on December 16th the fed funds target range will be raised by 25 basis points. This expected increase will be the first rate hike since June 2006 – when a share of Lehman Brothers cost more than a share of Apple, and when a lot of today’s Wall Street traders were…

While the topic may not have come up at the Thanksgiving table, it’s one of the most discussed issues in the markets right now: why have swap spreads gone (so) negative? Ask ten people and you’ll get ten different answers—and ten different recommendations for what to do about it. Here’s the eleventh. In a nutshell, the fixed rate on long-dated…

We hear annuity buyouts frequently discussed as a silver bullet to reduce pension plan risk. Whether buyouts are the right de-risking option was the main topic at the October Pension & Investments’ Pension Settlements Strategies Conference , which we cosponsored for the third year in a row. Judging by the interest we saw at the conference, plan sponsors are engaged…

NISA Investment Advisors, LLC (NISA) is pleased to present the 14th edition of the biennial Survey of Nuclear Decommissioning Trust (NDT) Sponsors. This report is published as a resource for and service to the NDT community. It is intended to provide insight into investment activities and trends within the NDT industry. Information contained herein has many potential uses and a…

We’ve witnessed a flurry of new guidance and regulations from both the Department of Treasury and Department of Labor related to retirement income. The growing retirement crisis has employees, employers and the government recognizing that this shared concern needs shared solutions. Washington has shown its focus on removing barriers and fostering adoption of retirement income solutions. As employers increasingly seek…

Finding the Right Corporate Bond Allocation with LDI Hibernation When de-risking with liability driven investing, pension plans must decide on the right blend of corporate bonds and Treasuries to hedge their liabilities. We look at the forces that can drive this decision and find that the mix of hedging bonds depends on changing market conditions. Plans should periodically examine their…

How Actuarial Assumptions Cloud Perceptions of Annuity Buyout Pricing Recent annuity purchases highlight the need to examine what drives their pricing. Plan sponsor announcements that allude to “par” settlements relative to accounting values warrant a closer look at the plan’s actuarial assumptions before reaching any conclusions about the attractiveness of a buyout’s economics. Introduction “We’re settling the retiree obligation with…

Combining Longevity Annuities and Bonds to Raise Retirement Income DC participants want the most for their money when choosing a retirement income strategy. While annuities can offer higher income, that value is partially reduced by expenses and the loss of control and liquidity. We quantify these drawbacks and find that the most efficient way to fund retirement spending may be…

How the New QLAC Rules Impact a Retirement Driven Investing Strategy DC plans can now offer deferred “longevity” annuities that provide income in the later years of retirement. This is good news for those participants who want the peace of mind that they won’t outlive their assets while retaining control over most of their portfolio. While the World Cup had…

The Retirement Driven Investing (RDI) Approach to Fixed Income in DC Plans Fixed income allocations in defined contribution plans, while perceived as low risk, may actually expose participants to substantial volatility in retirement income. To reduce this risk, sponsors can apply duration-matching techniques when designing target date funds or managed accounts. This offers participants stability in their retirement income expectations…

Why Yield Spreads Across Currencies Need Translation We have observed (with some bemusement) how the financial media often compares the yields on different countries’ debt without adjustment for the different currencies in which the debt is denominated. By overlooking a currency adjustment, investors may get a distorted risk-return picture when comparing sovereign bond yields. A lot of attention is paid…

Comparing De-Risking Strategies from a Contribution Perspective LDI hibernation strategies may present an opportunity to de-risk at a lower expected cost and on a more flexible contribution schedule than annuity buyouts. Additionally, plans that have not yet de-risked may be surprised by how little their equity allocations reduce expected contributions, and how much contribution volatility they may generate. Introduction For…

NISA Investment Advisors, LLC (NISA) is pleased to present the 13th edition of the biennial Survey of Nuclear Decommissioning Trust (NDT) Sponsors. This report is published as a resource for and service to the NDT community. It is intended to provide insight into investment activities and trends within the NDT industry. Information contained herein has many potential uses and a…

Many pension plan sponsors and fiduciaries are confronting perhaps the most important decision in the plan’s life – whether to pursue an internal de-risking strategy or pay an insurer to offload the liability. We highlight some key considerations for those faced with this choice, and explore the components of the amount a sponsor may pay in a buyout transaction. Though…

Pension plans run the risk that actual beneficiary lifespans can exceed those assumed in their liability projections. We estimate the risk to be about 0.4% annually in funded status terms. While longevity risk should not be ignored and can be managed, it is small relative to the market risks embedded in a typical plan’s assets and liability. Pension plans are…

Pension de-risking need not be an all-or-nothing decision. In fact, plan fiduciaries may be surprised by the degree to which pension risk profiles can be changed – marginally or materially – through asset allocation decisions and liability-driven investment (LDI) techniques. While annuity buyouts define the end point of the so-called de-risking spectrum, fiduciaries should compare them to other “hibernation” approaches…

By simply de-risking their pension plan, companies can realize most of the benefits of annuity purchases without incurring the upfront liquidity costs or committing to an irreversible decision. Along with the reduction in pension volatility, de-risking should improve credit ratings for some companies with large pension plans relative to their core businesses. The desire to de-risk pension plans is understandable…

Reducing tax consequences in equity portfolios offers tangible benefits in the current tax environment. Three key decisions that directly influence the after-tax performance of such portfolios include 1) portfolio dividend tilt, 2) portfolio turnover, and 3) capital gain/loss realization. Each of these decisions should be evaluated in the context of tracking error versus the desired benchmark and could ultimately affect…

NISA Investment Advisors, LLC (NISA) is pleased to introduce the Pension Surplus Risk Index, or PSRX*, a forward-looking estimate of the funded status volatility of US corporate defined benefit pension plans. The index level represents a one standard deviation change in funded status over a one year horizon, based on the average of the 100 largest pension plans.1 For example,…

Introduction Market indices serve as a barometer of market segment performance and are a means by which investors can evaluate strategies. Price-based indices which measure the value and performance of financial assets have been available for over 100 years. More recently, market participants have developed volatility-based indices to measure market risks. Though lesser known, a variety of providers offer measures…

The Case for Separating Interest Rate and Spread Risks U.S. pension plan demand for long duration corporate bonds has been and is expected to remain at a high level. Nonetheless, some sponsors have delayed implementing strategic corporate bond programs because of tactical views on Treasury yields. Given the ease of managing Treasury duration, this need not be the case. Pension…

One question frequently arises among investors considering bond strategies: Is this the time to invest in fixed income? Like any market, timing interest rates is challenging. This note will not address the merits (or potential) of timing the interest rate market. Rather, it addresses one key, and often overlooked, aspect of interest rate levels – specifically, rate changes that are…

Pension plans have used a variety of Liability Driven Investment (LDI) strategies for years. While an indispensable tool in our mind, traditional LDI strategies address only the interest rate risk within the pension plan. In this brief we introduce a more comprehensive platform, Dynamic LDI. The primary improvement Dynamic LDI strategies offer stems from the dynamic relationship between funded status…

NISA Investment Advisors, LLC (NISA) is pleased to present the 12th edition of the biennial Survey of Nuclear Decommissioning Trust (NDT) Sponsors. This report is published as a resource for and service to the NDT community. It is intended to provide insight into investment activities and trends within the NDT industry. Information contained herein has many potential uses and a…

Like most financial markets, interest rate markets have experienced pronounced volatility over the last 18 months (ending in April of 2009). Many pension liability hedge strategies that relied heavily on derivatives (most notably interest rate swaps) and Treasury bonds significantly outperformed changes in the plan’s reported liability. The question that naturally arises is: Are strategies that utilize interest rate swaps…

The recent widening of credit spreads has increased focus on the potential suitability and attractiveness of corporate bonds as pension plan investments. This paper examines one aspect of these issues – reducing funded status volatility by better matching the sensitivity of the liability’s discount rate to credit spreads using corporate bonds. To assess the effectiveness of corporate bonds for this…