US Pension Briefing – February 2024

Key takeaways

  • Pension discount rates increased for the second month in a row resulting in decreased liabilities.
  • Global equity returns were strongly positive while bonds generally decreased.
  • While funded status impact varies based on asset allocation, pension plans with equity allocations most likely saw decent funded status gains over the month.

February 2024 Summary

In general, pension liabilities decreased around 1.8% – 2.8% with rising discount rates in February, continuing the trend observed in January. The increase in discount rates was a result of increases in the Treasury yield curve across most maturity segments. While credit spreads narrowed during the month, it wasn’t enough to offset the increase in Treasury yields.

Global equities provided strongly positive returns over the month, with US equities delivering the highest overall returns, followed by emerging markets. In contrast, developed foreign markets experienced more modest positive returns.

Fixed income markets generally declined as interest rates increased. More aggressive bond segments, particularly those more reliant on credit spreads such as high yield and emerging market bonds, experienced a slight increase due to narrowing credit spreads.

A decrease in liabilities resulting from increases in discount rates and robust equity returns means many plan sponsors experienced funded status gains, despite declines in fixed income values.

Discount rates & asset returns

FTSE pension discount rate index last 12 months

Source: FTSE Pension Liability Index

Discount rates continued to rise during February, increasing by 0.20%. While the first two months of 2024 have seen smaller month to month changes than any month in Q1 of 2023, a nearly 40 bps increase since the beginning of the year is still indicative of high volatility in the discount curve.

US Treasury yield curve 

Source: U.S. Department of the Treasury

Once again, the Treasury yield curve shifted higher across all periods. While the trend over the past few months has been larger increases on the long end of the curve, the largest increases in February were the 2, 3, and 5 year yields with the 3 year increasing the most (+0.38%). Both Fed and market expectations show interest rates lowering in 2024, but the majority of the cuts are expected in the second half of the year.

February 2024 Investment returns (%)

Source: Morningstar

February was a good month for global equities. US equities returned 5.4% and emerging markets equities returned 4.8%. All US equity sectors experienced positive returns over the month. Consumer discretionary and industrials were the two best performing sectors returning 8.7% and 7.2% respectively. Small cap stocks outperformed large cap stocks, and growth stocks outperformed value stocks. The trend of increased interest rates continued in February, as the yield curve increased over all maturities. As a result, fixed income securities showed mostly negative returns for the month. High yield bonds had modest positive returns of 0.3%. Credit spreads narrowed over the month with emerging market debt narrowing the most by 0.3%.

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