Robin Diamonte, chief investment officer at United Technol- ogies, recalls a particularly upbeat meeting with her invest- ment committee. A commonly shared belief that interest
rates were on the rise was the cause of the excitement.
"It's all going to be good news from here on, because interest rates
are going to go up, and funded status is going to improve," Diamonte
said wryly, remembering the sentiment at the meeting. That was her
first year with the company in December 2004. “Here I am, 13 years
later, still waiting for interest rates to go up,” Diamonte said.
For CIOs looking to de-risk their LDI programs, the direction of
interest rates features as a central variable. Rising rates—which move
in the opposite direction to fixed income prices—allow companies to
de-risk their plans less expensively. Buying bonds at lower prices, of
course, allows defined benefit (DB) plans to match assets with liabilities
more cheaply. Moreover, if rising rates translate to higher corporate
bond yields, it may prove to be a tailwind for DB plans, as the present
value of one’s pension obligation is also lowered and the funded status
of the plan is improved given higher discount rates.
Signs that interest rates were finally headed for liftoff were in
abundance in 2017. Equity markets went on a tear following a new
administration that promised massive fiscal expansion and deregulation. Bond markets sold off on the prospect of inflationary growth
with the benchmark 10-year hitting 2.6% in March—the highest
level in three years. Signs of wage inflation mounted as unemployment dipped to 4.2% in October, the lowest level in decades.
By the year’s end, however, rates had started to roll over again. For
all the tough talk, the Trump administration ran into one stumbling
block after another—putting into serious question whether its loudly
Bolstered by hopes of fiscal expansion and above-trend GDP growth,
2017 saw expectations of rate rises climb—only to roll over again.
Where to From Here?
Reported by Vishesh Kumar / Art by Lars Leetaru