Key takeaways
- Discount rates were down in March with Treasury yields falling more than credit spreads were widening
- Even with the turmoil in the banking sector, equity market activity was generally positive
- Funded status for most pension plans decreased as liability growth outpaced investment returns
March 2023 summary
Despite issues in the banking sector during March, the economy continued to grow. The job market remained strong, in spite of more layoff announcements and higher wage costs. Inflation is coming down slowly but remains stubbornly higher than the Fed’s long-term target of 2%. The Fed raised the Federal Funds Rate by 0.25% (as in February), but less than the previous rate hikes. The Fed is likely to keep rates higher for longer in order to get inflation back under control. Overall stocks performed well during March, though smaller capitalization and value stocks tended to struggle.
Yields fell during March as angst in the banking sector led the market to believe that the Fed will need to cut rates later in the year. This weaker sentiment helped drive government yields down, especially at the front end of the curve, and credit spreads wider. The fall in government yields generally outweighed increases in spreads which translated to falling discount rates in March.
For most pension plans, the fall in discount rates increased liabilities by more than the growth in equities leading to deterioration of funded status.
Discount rates & asset returns
FTSE pension discount rate index last 12 months
Discount rates dropped in March, with the FTSE pension discount curve finishing the month just over 4.80%. The FTSE curve is up nearly 1.3% over a one-year timeframe but has dropped 0.70% since the end of last October.
March 2023 investment returns (%)
Market activity was generally positive in March despite financial distress from bank failures in the US and Europe. Employment data continued to come in strong along with inflation numbers that continued trending down. Despite this the Fed raised the Federal Funds Rate by another 0.25% during the month. Bond returns were positive in March and credit spreads widened. Gold ended close to $2000 and returned 7.68% during the banking sector turbulence.