- Discount rates rose sharply as Treasury yields increased across the entire yield curve and credit spreads widened.
- Equity returns were negative for the month due to ongoing uncertainty regarding Fed rate hikes, inflation, and political conflicts.
- While the rise in discount rates will result in a decline in liabilities for the month, plans with equity exposure may see a decline in funded status.
January 2022 summary
Discounts rates rose considerably during January with the biggest one-month positive increase since August of 2020, which will result in decreases in liabilities over the month. However, equity returns were negative with the S&P 500 having its worst month since March 2020. Even with the decreases in liabilities, plans that have any equity exposure most likely saw funded status declines over the month.
The biggest driver of volatility during the month was due to the Federal Reserve’s December announcement regarding the possibility of multiple rate hikes in 2022. Prior to their December announcement markets were anticipating 3 rate hikes starting mid-year but with inflation numbers remaining high the Fed has signaled that they’ll be taking more action and sooner. That announcement resulted in a turbulent month for global equities, as investors sold out of growth holdings in favor of less risky asset classes.
Heading into February, volatility within the equity markets seems poised to continue as a number of companies have reported unfavorable quarterly earnings, with some scaling back future earnings forecasts. This trend has been particularly troublesome for technology companies with previously high valuations. Additionally, companies that had benefitted from changes in consumer trends during the pandemic have seen their stock prices recede in recent months as the Omicron wave of the virus begins to wane. However, a stronger than anticipated January jobs report provides some optimism surrounding the prospects for the US economy.
Discount rates & asset returns
FTSE pension discount rate index last 12 months
Source: FTSE Pension Liability Index
Discount rates increased significantly throughout January, ending the month up about 0.33% higher than rates at year-end 2021 and up about 0.24% from the end of 2020. Treasury rates also ended the month up all along the curve, but especially at the short end, while at the same time credit spreads widened. The FTSE pension discount index finished January at 3.15%.
Investment returns (%)
Global equities faltered in January, with US equities declining nearly 6% after gaining nearly 4% in December. Persistent inflation and concerns around the possibility of multiple Fed rate hikes in 2022 resulted in heightened volatility, particularly for growth companies who had previously benefitted from years of historically low interest rates. Value stocks outperformed growth for the month, driven in large part by energy and financials. In fixed income, the yield curve continued to flatten, though yields moved higher across the entire curve. Given the rise in rates, bonds, and especially long Treasuries, posted negative returns for the second consecutive month. Credit spreads widened during the month as investors fled riskier assets such as High Yield bonds in reaction to weakening equity markets. Gold returns were slightly negative during the month, while the US dollar rose marginally.