US Pension Briefing – May 2024

Key takeaways

  • Discount rates dropped slightly due to market volatility while the Treasury yield curve shifted lower but remained inverted.
  • Equities surged and fixed income markets also performed well.
  • The strong market returns for the month were typically more than enough to cover liability growth resulting in funded status gains for most pension plans.

May 2024 summary

Treasury yields shifted lower across the curve during the month of May, decreasing pension discount rates while credit spreads remained stable. With the slight fall in discount rates, we expect pension liabilities will have increased minimally, 1%-2%, depending on a pension plan’s characteristics.

Both equities and fixed income securities had a strong performance in May. The strong performance was largely driven by several positive economic indicators: corporate earnings exceeded expectations, providing a boost to investor confidence; global inflation showed signs of cooling, alleviating some concerns about future interest rate hikes; and the Purchasing Manager’s Index (PMI) came in better than expected, signalling a healthier-than-anticipated economic environment. These factors collectively contributed to the optimistic market sentiment and drove gains across most asset classes.

The combined effect of May’s positive equity returns coupled with small discount rate decreases will most likely be positive news for pension plan funded statuses for the month. Plans with higher allocations to equities likely saw the greatest funded status gains.

Discount rates & asset returns

FTSE pension discount rate index last 12 months

FTSE pension discount rate index last 12 months May

Discount rates dropped during May, decreasing by 0.13%. Rates are still markedly higher than they were a year ago, up by 0.44%, and up 0.59% since the beginning of 2024 as markets digested that the Fed is increasingly unlikely to make multiple interest rate cuts this year. If economic data remains robust, especially inflation, then we would expect long-term rates to remain near current levels. Should economic data weaken, making Fed rate cuts more likely, then we would expect long-term interest rates to decline.

US Treasury yield curve

The Treasury yield curve shifted lower across all time periods as interest rates came down in May. The largest shifts came in the middle of the curve as the 3, 7 and 10-year maturities came down close to 0.20%. The curve remains inverted with the 2-year yield 0.38% higher than the 10-year yield. The next Fed meeting will be held in the middle of June, and experts expect the Fed to hold the funds rate in place as the Fed would like inflation to ease down farther before they start to cut rates.

May 2024 Investment returns (%)

May was a strong month for both equities and fixed income securities. US equities led the way returning 4.7%, followed by International Developed equities returning 3.9%. Emerging Markets equities posted a modest gain of 0.6%. Within US equities, all sectors experienced positive returns except for the energy sector. The information technology sector performed the best, returning 10.1%, led by the large tech stocks that make up a large percentage of the index. The utilities sector also performed well, returning 9%. With interest rates coming down over the month, fixed income securities also had positive returns. Long duration bonds performed the best returning roughly 2.8%. The US dollar index lost ground in May losing 1.5% and the price of gold increased 1.9%. Credit spreads stayed relatively flat compared to April month end, moving less than 0.10%.

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