Key takeaways
- Discount rates fell further in July as the Treasury yield continued to fall with expectations that a Fed rate cut in all but imminent.
- Equities increased their YTD gains although there was a shift from large cap/tech stocks to small cap and value stocks leading the way, at least for the month. Fixed income returns were good across most sectors as rates were down.
- The strong market returns for the month were once again typically more than enough to cover liability growth resulting in funded status gains for most pension plans (depending on asset allocation and beginning funded status levels).
July 2024 summary
Treasury yields moved lower again in July, leading to solid gains for most bond sectors. While the yield curve remains inverted, it’s at its narrowest level since January. Spread changes were muted, continuing a trend that extends through 2024. Equities on balance provided modest gains throughout the world, with leading stocks for the month rotating to smaller cap and value stocks in the U.S.
Changing economic conditions are leading to growing comfort that the Federal Reserve will soon cut interest rates. The Fed has subtly shifted its emphasis from controlling inflation to include employment considerations, increasing expectations that rates will be cut in September. In the equity markets, nearly two thirds of companies reporting earnings in July exceeded analyst expectations, helping to broaden equity market participation from the few tech stocks that have dragged US markets higher in 2024.
Despite discount rates moving lower leading to increased liabilities, the positive investment returns across almost all broad sectors was enough to once again outweigh the increases in liabilities. Pension plan sponsors most likely saw funded status gains depending on their asset allocation and beginning funded status levels.
Discount rates & asset returns
FTSE pension discount rate index last 12 months
Discount rates dropped during July, decreasing by 0.13%. Rates remain 0.22% higher than they were one year ago, and up 0.39% since the beginning of 2024. With economic data highlighting signs of a weakening economy in the early days of August, rates fell over 0.45% while spreads modestly increased putting August on a course for lower discount rates.
Discount rates dropped during July, decreasing by 0.13%. Rates remain 0.22% higher than they were one year ago, and up 0.39% since the beginning of 2024. With economic data highlighting signs of a weakening economy in the early days of August, rates fell over 0.45% while spreads modestly increased putting August on a course for lower discount rates.
US Treasury yield curve
The Treasury yield curve shifted lower across all maturities in July. The largest shifts occurred in the 2 and 3-year maturities, which declined by 0.42%. The curve remains inverted, with the 2-year yield 0.20% higher than the 10-year yield. The next Fed meeting will be held in September, and the Fed indicated in their July meeting that a September rate cut could be on the table.
July 2024 Investment returns (%)
July was a strong month for International Developed Equities and US Equities, posting gains of 2.93% and 1.86% respectively. Emerging Markets Equities made a slight gain of 0.30%. Within US Equities, Real Estate, Utilities, and Financials were leaders, with respective gains of 7.22%, 6.79%, and 6.46%. Communication Services were the worst performing sector, losing 4.01%. Fixed Income experienced positive returns as interest rates continued to fall, with long-duration bonds outperforming short-duration bonds. The US dollar index fell 1.67%, and the price of gold gained 4.93%. Credit spreads were about flat relative to June month end.