When will the Federal Reserve make its next move, and how high could rates go? These questions can seem like the only ones that matter in a hiking cycle. Plan sponsors, however, need to think differently. In an Asset TV “LDI Masterclass,” panelist Greg Garrett makes the case for looking at scenarios — and considering the possible impact on plan funded status.
Greg Garrett: I think it ultimately just comes down to thinking about more than just one scenario, right, and thinking about as we’ve been discussing, this idea that … just because the Fed’s raising policy rates on the front end of the curve doesn’t mean it’s going to happen on the back end. So after the March decision to raise interest rates by 25 basis points, actually the 10-year Treasury is down 30 basis points [through June].
And the other thing to be thinking about is we are late in the economic cycle. And that has implications for asset prices, whether it be bond spreads, which are particularly tight, equity valuations which are relatively high, and leverage which is relatively high.
So those are all factors that you need to be thinking about in addition to interest rates when thinking about a scenario for all of your assets, not just your bonds. And so that’s what we encourage our clients to do is think about a group of scenarios and put some probabilities around those scenarios and then begin thinking about how they want to manage the risk around their funded status volatility.
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