The reason meteorologists aren’t held accountable for their rain or snow predictions is that weather forecasts are made in terms of probability statements rather than absolute outcomes. This is why we forget the thunderstorms that failed to materialize and forgive the snowstorms that nobody predicted – a 60% chance of rain turns into a sunny day; a 30% chance of flurries culminates as a blizzard. While a probability statement provides an out, it also is a barometer of confidence. And, in the case of financial forecasts, the market itself provides such a measure.
While 2013 has been a fantastic year for equity markets and risk assets in general, a dark cloud looms on the horizon. At some point, the Federal Reserve (Fed) will initiate its plan to taper; the beginning of the end of the latest round of quantitative easing will commence and the support for U.S. Treasurys and mortgage-backed bonds will fade. Rates must rise, “they” say. But does the “market” have a view? Read more
Stop waiting on interest rates to manage DB risk and volatility!
What if a plan sponsor could take steps to help minimize costs and control volatility in their defined benefit (DB) plan regardless of the interest rate?
A recent paper published by Principal Financial Group® says it can be possible. (PDF: 694 KB)
It’s a common belief that interest rates have nowhere to go but up. And because bond investments typically go down in value when interest rates go up, plan sponsors may be avoiding investments in bonds in favor of other options. As the duration – that is, the length of the maturity of the bond – extends longer, the larger the decline in the bond investment will likely be if interest rates increase. So plan sponsors that invest in bonds have generally been sticking to shorter duration bond investments.
If a plan sponsor feels interest rates will go up, should they avoid bonds – and in particular longer duration investments? According to this article, that is not necessarily the case. Read more
Hand-holding is getting to be very popular with the world’s major central banks. Effectively constrained by zero or near-zero interest rates, central banks have been putting greater emphasis on the effectiveness of their communications. Central bank “speak” – if used wisely – holds the power to ease monetary conditions as much as, if not more than, policy rate changes. Read more
I know what you’re thinking. First Kenny Rogers and now the Rolling Stones? Why does this guy keep quoting 1980s songs and relating them to defined benefit (DB) plans?
Well, there were two things I did during my summer nights as a teenager growing up in the ’80s that left a lifelong impact on me – listening to music and dreaming about DB plans. Didn’t we all? More on this later….
Anyway, in my last post, I introduced the idea of dynamic asset allocation (DAA) as a DB plan risk management strategy. This strategy works particularly well with hard frozen DB plans.
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