In February, an increase in liability discount rates fueled improvements in the funded status of many corporate pension plans despite declines in the equity markets. However, plans with higher interest rate hedge ratios may have experienced a more muted change in funded ratio last month. The Treasury yield curve increased in February and remained inverted between the one- and 10-year tenors. Total-return-focused plans likely experienced gains in funded status from higher liability discount rates. Many LDI-oriented plans saw modest changes in funded status as declining liabilities were offset by equity market losses. NEPC’s hypothetical pension plans witnessed a funded status increase of 3.2% for the total return plan compared to an improvement of 0.1% for the LDI-focused plan.
Rate Movement Commentary
The Treasury curve increased at all tenors during the month, and remained inverted from the one- to 10-year tenors. The 10-year yield increased 40 basis points to 3.92% and the 30-year yield rose 28 basis points to 3.93%. Rates for tenors up to 15 years have increased YTD while the 30-year tenor is down slightly YTD. Long-credit spreads widened 10 basis points during the month while intermediate spreads widened four basis points during February.
The movement in Treasury rates and credit spreads resulted in an increase in the pension discount rates used to discount pension liabilities. The discount rates for NEPC’s hypothetical pension plans increased ~40 basis points with the open total-return plan rate at 5.27%, while the discount rate for the frozen LDI-focused plan was 5.24%.
Plan Sponsor Considerations
Equity and fixed-income markets were largely negative in February. Treasury yields increased and the yield curve remained inverted between the one- and 10-year tenors. This resulted in 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 interest rates with a flatter yield curve.
Market Environment and Yield Curve Movement
In February, U.S. equities were down 2.4%, according to the S&P 500 Index. Non-U.S. equity markets also lagged with international developed markets declining 2.1% in February, according to the MSCI EAFE Index. Emerging market equities were down 6.5% last month, according to the MSCI EM Index; global equities lost 2.9% during the same period, according to the MSCI ACWI Index.
The Treasury curve increased last month at all tenors and remained inverted from the one- to 10-year tenors. This resulted in losses for fixed-income markets, particularly for longer-duration assets. During the month, the Bloomberg Long Treasury Index was down 4.7% and the Bloomberg Long Credit Index declined 5.2%.
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