Long Duration | Capital Group

Long Duration

INVESTMENT INSIGHTS  |  August 2019  |  FEATURING Greg Garrett

Long duration credit update for the second quarter of 2019

Central banks continued to play a pivotal role in guiding investor sentiment during the second quarter. Signs of slowing growth, increased market volatility and trade tensions were enough to convince them that potential downside risks warranted a response. At its June meeting, the U.S. Federal Reserve clearly articulated the potential for policy rate cuts in the second half of 2019. The European Central Bank and the Bank of Japan conveyed similar messages. This shift improved investor sentiment and drove credit spreads lower; they finished the quarter slightly below where they began.

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INVESTMENT INSIGHTS  |  July 2019  |  FEATURING Colyar Pridgen

Charting the LDI opportunity set

Since the early years of liability-driven investing (LDI), many defined benefit (DB) pension plan sponsors have cast a wide net for investments to reap higher returns and hedge long-term plan liabilities. While this has led some sponsors toward ever more creative and less traditional avenues to access long duration, the core hedging assets in most LDI programs remain investment-grade government and credit bonds, often weighted toward the long end (maturities of 10 years or more).

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INVESTMENT INSIGHTS  |  May 2019  |  FEATURING Greg Garrett

Long duration credit update for the first quarter of 2019

After a significant widening of spreads in the fourth quarter, credit markets rebounded along with equities and other risk assets during the first quarter. A key catalyst of positive sentiment was a more accommodative stance from the U.S. Federal Reserve. This drove U.S. Treasury yields lower across the yield curve and pushed the 10-year Treasury rate below the fed funds rate – a condition that has preceded each of the last three recessions by one to three years. Long-dated investment-grade credit spreads narrowed by 27 basis points (bps) to 173bps during the quarter. The spread tightening combined with lower Treasury yields cut the long corporate credit yield to 4.41% from 4.91%.

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INVESTMENT INSIGHTS  |  February 2019  |  FEATURING Greg Garrett

Long duration credit update for the fourth quarter of 2018

Global economic momentum decelerated in the fourth quarter. An inversion of two- and five-year yields and shifting growth expectations contributed to significant stock market volatility and wider credit spreads. Long duration investment-grade corporate bond spreads widened 47 basis points to 200bp, mostly due to falling U.S. Treasury yields.

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MARKET COMMENTARY  |  September 2017  |  FEATURING Wesley Phoa, PhD

Are Financial Markets Really All That Efficient?

In this month's LDI market commentary:

• September’s Treasury market action

• Credit outlook for technology companies

• Financial markets efficiency, or lack thereof

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MARKET COMMENTARY  |  August 2017  |  FEATURING Wesley Phoa, PhD

Will QE Withdrawal Send Rates Much Higher?

In this month's LDI market commentary:

• August’s Treasury market rally

• Credit outlook for metals and mining companies

• Implications of QE withdrawal for LDI investors

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MARKET COMMENTARY  |  July 2017  |  FEATURING Wesley Phoa, PhD

Navigating the Shifting Ground of American Retail

In this month's LDI market commentary:

• July’s rallying bond market activity

• The outlook for the retail sector

• E-commerce’s impact on brick-and-mortar stores and its implications for LDI investors

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MARKET COMMENTARY  |  June 2017  |  FEATURING Wesley Phoa, PhD

Prepare for Volatility as Crisis-Era Policies Unwind

In this month's LDI market commentary:

• June’s muted bond market activity

• The outlook for the health care sector

• Rising volatility expectations for LDI investors

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MARKET COMMENTARY  |  May 2017  |  FEATURING Wesley Phoa, PhD

Does the Market Need a 100-Year Treasury Bond?

In this month's LDI market commentary:

• May's bond market activity

• The outlook for the utilities sector

• Why a 20-year Treasury could have traction with LDI Investors

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MARKET COMMENTARY  |  April 2017  |  FEATURING Wesley Phoa, PhD

How Will Central Banks Respond to the Next Financial Crisis?

In this month's LDI market commentary:

• April's bond market activity

• The outlook for the communications sector

• Evolution of global monetary policy and implications for pension plans

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To contribute, or not? It's a big question for plan sponsors. Our experience working with sponsors suggests that it's typically optimal for them to make some contributions — especially from an after-tax perspective. What’s more, there’s good reason to think that the economics of making contributions will become still more compelling over the next few years. Underfunded plans will face a large and growing cash penalty for deferring contributions. Because the economics are swinging strongly in favor of making contributions, plan sponsors with bond market access may even have an incentive to borrow to fund the plan.

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INVESTMENT INSIGHTS  |  January 2016

What Should Plan Sponsors Do When Rates Rise? It Depends…

For a long time, a rise in interest rates has been discussed and expected. While the Federal Reserve has finally begun its move away from its near-zero interest rate policy and a further rise in rates may now seem imminent, the past few years have for some sponsors underscored the fact that “being early” can prove expensive. Plan sponsors who want to prepare for higher rates should not pick strategies that are too sensitive to the precise timing of a rise in rates.

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INVESTMENT INSIGHTS  |  January 2016

When Rates Rise, How Might Your LDI Strategy Fare?

The Federal Reserve has finally begun its move away from its near-zero interest rate policy, and many plan sponsors may expect interest rates to rise further. From an LDI perspective, what should you do if and when rates rise, and discount rates increase accordingly? This, it turns out, is a simple question with a far-from-simple answer. Interest rates can go up for a variety of reasons. The economic backdrops in which liability discount rates may rise can be surprisingly different and, consequently, so can the behavior of asset prices.

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