In October, defined benefit pension plan sponsors experienced varied changes in funded status due to a combination of higher liability discount rates and losses in global equities. During this period, losses from global public stocks offset potential increases in funded status resulting from higher liability discount rates. Through the end of October, global public equity returns remained positive year-to-date with gains across many regions. The Treasury yield curve increased across most tenors for the month and corporate pension plans likely experienced mixed changes in funded status. NEPC’s hypothetical total-return pension plan increased 2.1% in funded status compared to a decline of 0.1% for our LDI-focused plan.
Rate Movement Commentary
The Treasury yield curve shifted upward in the month of October. The 10-year yield increased 47 basis points to 4.28%, while the 30-year yield rose 33 basis points to 4.47%. Corporate bond spreads were modestly lower for the month and remain tight relative to historical levels.
The movement in Treasury rates and credit spreads resulted in higher pension discount rates used to value pension liabilities. The discount rates for NEPC’s hypothetical pension plans increased about 32 basis points to 5.37% for the open total-return plan, while the discount rate for the frozen LDI-focused plan increased 37 basis points to 5.29%.
Plan Sponsor Considerations
In October, global public equities were in the red and long-dated fixed-income posted losses fueled by increases in Treasury rates. Treasury yields shifted upward last month across most maturities, while credit spreads remained largely unchanged. 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 interest rate hedge ratios to avoid becoming overhedged to longer-maturity rates with a changing yield curve.
Market Environment and Yield Curve Movement
U.S. equities fell 0.9% in October, according to the S&P 500 Index. During the same period, non-U.S. equities also experienced losses with international developed markets down 5.4%, according to the MSCI EAFE Index. Emerging market equities were down 4.4% last month, according to the MSCI EM Index. Broadly, global equities decreased 2.2% during the month, according to the MSCI ACWI Index.
In October, the Treasury curve increased from the previous month and remains relatively flat. This generally resulted in negative performance for investment-grade fixed-income markets, with both long-credit fixed income and long Treasuries experiencing losses. During the month, the Bloomberg Long Treasury Index decreased 5.2% and the Bloomberg Long Credit Index was down 4.2%.
Related Insights
